UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Chancellor Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-2626079
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
745 Atlantic Avenue, Boston, Massachusetts 02111
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (617) 728-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of May 15, 1997, 5,136,391 shares of Common Stock, $.01 par value per share,
and 8,000,000 shares of Series AA Convertible Preferred Stock $.01 par value per
share (with a liquidation preference of $.50 per share or $4,000,000) were
outstanding. Aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 31, 1997 was approximately $354,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders to be held
August 29, 1997, at 2:00 p.m. - Part III
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This Annual Report on Form 10-K contains certain "Forward-Looking" statements as
such term is defined in the Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management as well as assumptions used in this report,
the words "anticipate," "believe," "estimate," "expect," and "intend" and words
or phrases of similar import, as they relate to the Company or its subsidiaries
or the Company management, are intended to identify forward-looking statements.
Such statements reflect the current risks, uncertainties and assumptions related
to certain factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
distribution networks, product introduction and acceptance, technology changes
and changes in industry conditions. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
PART I
ITEM 1. BUSINESS.
Chancellor Corporation ("Chancellor" or the "Company") was incorporated in
Massachusetts in January 1977. It is principally engaged in (1) buying, selling,
leasing and remarketing new and used equipment, (2) managing equipment on and
off-lease, and (3) arranging equipment-related financing through its principal
subsidiary, Chancellor Fleet Corporation ("Fleet"), which was incorporated in
Massachusetts in January 1980.
HISTORICAL BUSINESS AND FISCAL YEAR 1996 SIGNIFICANT DEVELOPMENTS
The Company originates lease transactions directly with equipment users and in
most cases sells those leases to investors. The Company also manages most of the
leases it sells to investors and, when the original leases expire or terminate,
remarkets the equipment for the benefit of the investors and the Company. The
Company originates leases involving primarily transportation equipment, but also
other equipment including material handling equipment and construction
equipment. Investors who purchase equipment subject to a lease receive the tax
and most of the economic benefits associated with the lease transaction. In
certain cases, the Company has retained leases for its own account. The Company
also arranges non-recourse financing for some of the leases which it sells and
for most leases which it has retained for its own account. Typically, when the
Company originates leases, the investors or buyers of those leases are not
known. Therefore, the Company at the time of entering into the lease transaction
is "underwriting" the lease. At the expiration or early termination of the
original lease, the Company typically sells or releases the equipment on behalf
of the investor.
As previously reported in regulatory filings, the Company incurred cumulative
losses in excess of $50 million during the period 1989 through 1996. The Company
recorded losses of $6,804,000, $1,221,000, and $3,343,000 during fiscal 1996,
1995, and 1994, respectively. These continued losses are due primarily to the
lack of sufficient cash flow to add new leases to the Company's own lease
portfolio. Additionally, fiscal 1996 results were adversely affected by a
significant decline in revenues; costs incurred for financing equipment; and
restructuring, transition and consulting costs of approximately $2,724,000.
In December 1996, a restructuring of the Company (the "Restructuring") occurred
pursuant to which certain members of the Company's Board of Directors and senior
management were replaced. In connection with the Restructuring, the Company's
Board of Directors unanimously adopted resolutions accepting the resignations
submitted by Messrs. Dayton, Killilea and Morison as directors; Mr. Morison's
resignation as an officer; and approving the termination of a Voting Agreement
dated April 11, 1996, other than section 1.5 of such Agreement which relates to
indemnification of directors, among the Company, Brian M. Adley and the
Company's majority shareholder, Vestex Capital Corporation ("VCC" or "Vestex").
As a result of the termination of the Voting Agreement described above, all
directors of the Company are now subject to election by plurality vote of the
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holders of the Company's Common Stock and Series AA Preferred Stock, voting
together as a single class. Vestex, whose stock ownership entitles it to cast a
majority of the votes which may be cast by all stockholders, has sufficient
voting power to elect the entire Board. As the sole remaining incumbent
director, Mr. Adley, voted for the election of Messrs. Ernest Rolls, Michael
Marchese and Rudolph Peselman as directors to serve until the next Annual
Meeting of Stockholders. Additionally, Mr. Gerald Brauser was nominated as an
advisor to the Board.
In December 1996, Vestex Capital Corporation provided to the Company a $500,000
loan due November 1997 with a per annum interest of 2% above the prime rate.
This loan is subordinated to certain loans held by an intercreditor group (See
Note G to the Notes to the Consolidated Financial Statements). In consideration
for subordination of the loan to the intercreditor group, the intercreditor
group assigned to VCC its warrants to purchase up to 10% of the Common Stock of
the Company on a fully diluted basis for $.27 per share.
In February 1997, the Board of Directors approved the issuance of 3,000,000
shares of the Company's Series AA Convertible Preferred Stock at $.30 per share
to Vestex in consideration of $900,000 of consulting fees due Vestex. In
addition, during the first quarter of 1997, the Company received loans from VCC
of approximately $250,000 which are due on demand.
In April 1997, the Company repaid loans due to the intercreditor group in
advance of their terms. The balance due on the intercreditor group loans as of
April 1997 was approximately $1,906,000. The intercreditor group accepted a
payment of $976,000 in cash, plus closing fees of $22,000, and forgave the
remaining balance of $930,000.
In conjunction with the sale of its majority position to Vestex in 1995, Bruncor
(the previous majority stockholder of the Company) also repaid the Company's,
borrowings, inclusive of interest, of approximately $4,000,000 from a lender
which Bruncor had guaranteed. In addition, Bruncor released the Company from any
obligations to repay the amount paid by Bruncor under the Guarantee. This
resulted in the retention of net operating losses ("NOL's") by the Company which
will have future benefit to the Company. In April 1996, the Company and Vestex
entered into an additional amendment to the Recapitalization Agreement whereby
the Company issued and sold to VCC 5,000,000 shares of its Series AA Convertible
Preferred Stock for $1,350,000 in cash, less reimbursement of $329,500 of
transaction costs which includes a reimbursement of $312,500 to VCC by the
Company. Additionally, Vestex forgave proposed but undeclared dividends of
$1,150,000.
In May 1996, prior management authorized the creation of a joint venture called
Truckscan LLC ("Truckscan") pursuant to which the Company was required to
provide a $100,000 non-refundable security deposit. In April 1997, the new
senior management team evaluated all alternatives to divest itself of this 50%
joint venture. On May 1, 1997 the Company sold its 50% investment in Truckscan
to Telescan Technologies, LLC ("Telescan,") the other 50% owner, a party
unrelated to the Company. In consideration for the sale, the Company received
certain assets from Telescan with an estimated value of $35,000 and a one year
promissory note in the amount of $50,000 secured by certain assets of Telescan
and forgiveness of a promissory commitment to contribute capital of
approximately $300,000 which was authorized by the former management and Board.
Prior to 1996, the Company utilized a combination of benchmark/matrices for
establishing performance of the residual portfolio. During 1996, due to changes
in market conditions, the Company evaluated residual values based upon
independent assessments by an industry professionals, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
The ability of the Company to operate profitably in the future will depend
largely on the amount of new capital available to the Company and the cost of
that capital. The Company continues to explore possible sources of new capital
including, for example, obtaining new or additional recourse debt, obtaining new
equity capital, securitizing lease transactions, obtaining equity capital from
private investors, purchases of equipment leases originated by the Company
and/or entering into strategic alliances/joint ventures with other leasing or
financial services companies and the sale of ancillary business units and/or
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assets as considered appropriate. The Company intends to invest any new capital
that it obtains in leases for its own portfolios (if practical) as well as to
invest in certain remarketing and other business operations.
Description of Business
The majority of the Company's leases are noncancelable "net" leases which
contain provisions under which the customer must make all lease payments
regardless of any defects in the equipment and which require the customer to
insure the equipment against casualty loss, and pay all related property, sales
and other taxes. Some of the leases written by the Company provide for early
termination options. Generally, these options may be exercised at specified
times upon receipt by the Company of an amount at least equal to the discounted
present value of remaining rent payments. The Company intends to collect all
termination payments. Other leases allow the lessee at certain times to require
the Company to attempt to sell or sublease the equipment for the lessee, with
the Company sharing in any losses or gains should a decrease or increase in
revenue streams occur as a result.
Leases are generally originated for private third party purchasers of equipment.
The Company's lease origination marketing strategy is transaction driven. With
each lease origination opportunity, the Company evaluates both the prospective
lessee and the equipment to be leased. With respect to each potential lessee,
the Company evaluates the lessee's credit worthiness. With respect to the
equipment, the Company evaluates the remarketing potential.
The Company currently concentrates on leasing transportation equipment, such as
tractors, trailers and trucks. The Company also leases construction equipment,
aircraft, material handling equipment and other equipment.
The Company leases equipment to lessees in diverse industries throughout the
United States. Although the Company's direct solicitation efforts involving
leases of new equipment have shifted from Fortune 100 companies to include
smaller business entities, to minimize credit risk, most of the Company's
lessees of new equipment are still of substantial creditworthiness, with minimum
net worth in excess of $25 million.
The Company finances equipment purchases with the proceeds of borrowings under a
short-term, secured inventory ("warehouse") line of credit. Repayment of the
warehouse line of credit typically occurs upon the sale of the equipment to
private investors.
The Company's level of lease originations declined significantly in the years
1989 through 1996. Between 1989 and 1996 the Company sold substantially all new
lease originations to private investors and retained very few lease originations
for its own account. During 1996, the Company entered into approximately 42 new
lease transactions involving equipment having an original equipment cost of
approximately $21 million, versus 56 transactions involving equipment having an
original cost of $27 million in 1995 and 19 transactions involving equipment
having an original cost of $14 million in 1994. Additionally, the Company
realized cash from origination activities of $224,000, $144,000, and $276,000 in
1996, 1995, and 1994, respectively.
During 1996, the three largest lessees accounted for 42% (ConAgra, Inc.), 11%
(Western Auto Supply) and 10% (Chrysler Corporation) of the new lease
transactions originated by the Company (see Notes to the Consolidated Financial
Statements). During 1996, 1995 and 1994, revenue from leasing activities was
approximately $867,000, $940,000 and $759,000, respectively.
Equipment Acquisition. No equipment was acquired by the Company during 1996 and
1994 as compared to equipment acquisitions (at cost) of $276,000 in 1995. This
decision is the result of the former management teams decision not to allocate
available capital resources to equipment purchases.
Equipment Disposition. In 1996, the Company disposed of $11.4 million of the
Company's portfolio equipment (measured by its original cost) on operating
leases and disposed of no equipment on direct finance leases, reducing the total
equipment (net of depreciation, pay-down and write-downs) on operating leases
and direct finance leases to $497,000 and $748,000, respectively. In 1996, the
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Company voluntarily sold $1.1 million of equipment under one lease from the
portfolio prior to lease expiration in order to generate sufficient liquidity to
meet short-term cash needs. In 1995, the Company disposed of $22.9 million of
equipment measured by its original cost which reduced the total equipment (net
of depreciation, paydowns and write-downs) on operating leases and direct
finance lease to $1.7 million and $1.4 million, respectively. In 1995 no leases
were voluntarily sold by the Company prior to lease expiration. In 1994, the
Company disposed of $17.4 million (at original cost)of portfolio equipment on
operating leases and disposed of no equipment on direct finance leases, reducing
the total equipment (net of depreciation, pay-downs and write-downs) on
operating leases and direct finance leases to $7.5 million and $2.0 million,
respectively. In 1994, $3.9 million (at original cost) of equipment under six
leases was voluntarily sold by the Company prior to lease expiration.
Remarketing Activities
The remarketing of equipment plays a vital role in the operations of the Company
because, in connection with the sale of lease transactions to investors, the
Company typically is entitled to share in a portion of the residual value
realized upon remarketing. Successful remarketing of the equipment is essential
not only to the realization of the Company's interest in the residual value but
also for the Company to recover its original investment in the equipment in its
portfolios and to recognize a return on that investment.
The Company anticipates continuing to dedicate substantial resources toward the
further development and improvement of its remarketing capabilities which is a
significant profit center for the Company. The Company's strategy is to exploit
its remarketing expertise by providing fee-based remarketing services to fleet
equipment owners and lessees and also to create a dealer capability under which
the Company would buy and re-sell fleet equipment. It has also implemented a
plan to expand its brokerage activities through the Internet and the use of
other technologies. Since 1993, the Company's senior lender group has permitted
the Company to use some of its equipment financing capability for dealer
financing purposes. The Company has developed relationships with two finance
companies to provide financing for remarketing customers, which the Company
intends to expand in 1997.
Since 1988, the Company has greatly expanded and altered its remarketing
activities. In 1990, the Company's remarketing operation headquarters were
consolidated in Massachusetts, with regional sales offices in New Jersey,
Tennessee and Texas. In 1992, the Company relocated its Midwestern regional
office from Tennessee to Illinois. In addition, due to its success in
remarketing used fleet equipment from its retail sales center in New Jersey, the
Company has developed indirect retail sales capabilities in California, Florida,
Georgia, Illinois and Texas.
The Company has found that its ability to remarket equipment is affected by a
number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of the remarketing.
Remarketing efforts are pursued on a direct retail sale or lease basis. The
Company's fleet equipment remarketing experience has shown that generally the
greatest residual value is realized by initially re-leasing equipment, rather
than immediately selling it. Therefore, the Company has concentrated its
remarketing efforts on re-leasing, although re-leasing involves more risks than
selling because lessees of used equipment are generally smaller, less
creditworthy enterprises than the Company's initial lessees. The Company has
also enjoyed success selling fleet equipment through its retail sales centers,
which the Company plans to further develop in 1997.
Equity Syndications
The Company sells its lease transactions to private investors through the sale
of interests in grantor trusts. In the grantor trust structure, the equipment is
acquired directly by the trust and the related lease is transferred to that
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trust. The Company or one of its subsidiaries usually acts as trustee and in
that capacity holds title to the equipment and performs certain specified
functions. The Company typically sells equipment directly to an investor. The
Company sold approximately $21 million, $27 million, and $14 million of
equipment to private investors during 1996, 1995 and 1994, respectively. The
Company receives fees upon these sales. In addition, the Company often shares
with the investor in the residual value derived from the remarketing of
equipment at lease expiration or early termination.
Competition
The principal methods by which the Company competes are its ability to
underwrite the lease transactions which it originates; its knowledge of the
equipment used by its lessees; the training and experience of its personnel; the
relationships and reputation it has established with lessees, equipment
suppliers and financial institutions; its ability to adapt to changing
regulations and tax laws; and its experience in successfully remarketing the
equipment at lease termination.
The equipment leasing business, on a global basis, is a highly competitive,
fragmented marketplace with thousands of competitors. Chancellor's competitors
include (1) large diversified financial services companies, (2) other leasing
companies and (3) vendor financing programs. Many of these organizations have
greater financial resources than the Company and, therefore, may be able to
obtain funds or equipment on more favorable terms than those available to the
Company. Additionally, the Company competes against other financing alternatives
available to lessees for the purchase of equipment.
BUSINESS PLAN
The Company's strategy is to return to profitability, increase market share, and
create growth opportunities by expanding its core business by servicing middle
market clients, expanding into new transportation and equipment markets and
seeking strategic financial partnerships and joint ventures domestically and
internationally.
Strengthening of Core Business. Historically, the Company has focused its
efforts on Fortune 100 companies. In the future, the Company will primarily
refocus its transportation equipment and remarketing expertise by expanding the
number of customers within its target market. The Company will be a transaction
intermediary to the Fortune 100 and focus origination activities on middle
market clients with a variety of transportation equipment requirements. The
strategic decision to de-emphasize origination activities within the highly
competitive Fortune 100 marketplace is expected to result in higher gross
margins while utilizing the Company's twenty years of historical equipment
residual performance.
Aggressive Entry into Select Markets. Through acquisitions and strategic
financial partnerships the Company will compliment its core business by entering
into general equipment leasing. The Company believes that these businesses will
strengthen its origination base and provide valuable new market opportunities.
Independent outside advisers believe that tremendous opportunities also exist in
the origination and remarketing of aircraft, barges and other equipment utilized
for infrastructure projects. These "big ticket" leases play to Chancellor's
strength and are natural avenues for expansion. A number of potential targets
have been identified and preliminary discussions have occurred.
Targeted International Expansion. The Company perceives significant
opportunities for its services in international markets. Additionally, the
Company can benefit from higher margins in less competitive international
markets.
Business Expansion
Since the change in management and Board control on December 3, 1996 the Company
closely scrutinizes transactions to maximize profitability. As a result of the
restructuring and concentration on profit centers, the Company is expected to
establish a foundation for profitable business expansion.
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As an outgrowth of the Company's core transportation leasing business, several
acquisitions are being evaluated that provide for vertical and horizontal
integration into businesses that utilize similar back office operations.
In March 1997, the Company originated its first equipment transaction in the
Commonwealth of Independent States ("CIS"). The opportunity to deliver equipment
leasing in an emerging market with minimal competition is an important first
step in origination growth at Chancellor. Also, a transportation remarketing
agreement with LukOil (the second largest petroleum producer in the world) to
sell thousands of tractor/trailer combinations beginning in the third quarter of
1997 is currently being negotiated. Another transaction is being negotiated with
Kamaz, the largest truck manufacturer in the CIS, in which Chancellor would
originate/remarket transportation equipment internationally.
In 1997, the Company will launch its own division focusing on raising debt and
equity for equipment transactions. This operating unit is expected to lower the
cost of capital to fund investing activity and sell asset backed securities
linked to the Company's origination efforts.
An aggressive mergers and acquisition plan seeking vertical and horizontal
candidates will commence in the second quarter of 1997. This plan will involve
members of senior management and outside professionals reporting to a Mergers
and Acquisitions subcommittee of the Board of Directors. This group will
evaluate a variety of domestic and international leasing companies and related
opportunities, for potential involvement.
Communications and Information
The Company is also in the process of implementing a new Management Information
System (MIS). This integrated system will provide back office operations with
the detailed information necessary to track transactions and will facilitate
management's ability to evaluate operations to ensure proactive decision-making.
This new MIS system will utilize client-server technology which will increase
productivity, reduce costs, provide easy access to centralized data and improve
communications. A broader scope of benefits includes company re-engineering and
cultural change, sophisticated customer services, elimination of outside
delivery and soft cost reductions.
Additionally, the Company's new team has re-designed and implemented a new home
page (http://www.chancellorfleet.com) allows the Company to electronically
disseminate its financial services information as well as remarketing expertise
on the Internet.
Market Opportunities
Through implementation of a strategy allowing for penetration of non-Fortune 100
customers, the Company will broaden its target market to a less competitive and
price sensitive arena. The Company will focus its energies domestically and
internationally on the multi billion leasing marketplace. The ability of the
Company to originate and remarket equipment in underdeveloped and inefficient
markets translates into higher potential rates of return. Additionally, the
willingness of the Company's strategic financial partners to augment the
Company's deal underwriting capabilities provides financial strength to execute
transactions.
Domestic Market
The diversification outside the highly competitive Fortune 100 tractor/trailer
market as an origination portfolio player enables the Company to focus its
leasing activities on selective transportation deals as well as non-
transportation equipment such as computers, general office equipment,
telecommunications, and other high technology equipment. The decision to
originate assets in the growing equipment leasing marketplace will focus on
assets with three to five year life cycles and capitalize on the Company's
strong remarketing efforts. Adding additional lines of origination in less
competitive markets will allow Chancellor to execute profitable transactions.
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During 1997 the Company will expand its origination presence to pro-actively
sell origination services. This physical presence is expected to allow the
origination division to evaluate and work closely with thousands of middle
market clients by providing quality financial services generally unavailable
from other sources.
In the third quarter of 1997, the Company expects to establish an in-house
Buy/Sell subsidiary to execute asset arbitrage transactions of used equipment.
The Company's management information system based on historical pricing values,
will allow an asset to be priced and marketed immediately to customers who have
a relationship with the Company. This strategic tool allows Chancellor to
identify the most likely candidates and pre-sell equipment, resulting in minimal
capital risk and higher margins.
Additionally the Company plans to expand beyond traditional lease origination by
establishing a venture leasing activity during the next 12 months which will
secure equipment for high growth companies. This division will seek
relationships with rapidly growing venture capital backed enterprises that may
not qualify for bank or other conventional financing at this time. As these
relationships grow, the Company envisions maintaining exclusive equipment
leasing contracts for their future equipment requirements.
The move away from Fortune 100 customers carries a risk/reward profile which
will be evaluated on a transaction by transaction basis by the Transaction
Review Committee composed of senior management and independent directors. This
accountability is expected to result in the protection of shareholder assets and
a return to profitability.
The Company is actively engaged in negotiations with strategic domestic
financial partners to leverage the Company's remarketing expertise.
International Markets
A key element of the corporate growth strategy is to make the Company an
originator/remarketer of transportation and non-transportation equipment outside
the United States. These additional international revenue streams, where margins
are significantly higher than the domestic market, should help facilitate the
Company's goals of returning to break-even and expectations of profitability.
Exposure on these transactions will be mitigated through the use of credit
enhancement and letter of credit instruments.
The Company has had preliminary discussions with companies needing equipment in
regions such as the Commonwealth of Independent States (CIS), Eastern Europe,
South America, Africa and the Pacific Rim.
In conjunction with Kent International, an international business developer
having a primary focus of operating companies in the CIS, the Company completed
its first CIS based transaction in 1997. Negotiations are currently underway to
originate/remarket equipment and establish strategic partnerships with Sberbank,
second largest Russian retail bank; LukOil, the largest petroleum producer in
the CIS; and Kamaz, the largest Russian truck manufacturer. These three
negotiations represent the beginning of the Company's presence in the emerging
CIS market.
In Africa, the Company is negotiating numerous transactions with a financial
institution to deliver a variety of infrastructure related equipment. This
equipment will be funded through the Overseas Private Investment Corporation
("OPIC") as part of their efforts on the continent. A separate transaction may
deliver transportation equipment to thousands of truck operators in South
Africa. The integration of a leasing and support service package provides the
Company with a unique deliverable in this emerging market and other potential
joint ventures with United States/South African investors may occur.
As a result of its strength in the management of assets, the Company has a
unique opportunity to originate and/or remarket long lived assets in the
international marketplace. As continued emphasis is placed on projects to
rebuild and improve infrastructure, the need for capital equipment in these
international markets is expected to grow.
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Operating Facility
The Company's fully integrated sales and marketing departments are headquartered
in Boston, Massachusetts. Two additional satellite operations are located in
Boca Raton, Florida and New York City, New York. A direct sales staff and
telemarketing program support a national network of sales representatives.
Seasonality
Because of tax and investment considerations, investors frequently defer their
decisions to purchase lease transactions until after the first quarter of the
calender year.
EMPLOYEES.
As of May 15, 1997, the Company employed 26 persons on a full time basis.
ITEM 2. PROPERTIES.
The Company leases an office facility in Boston, Massachusetts. This facility
houses the Company's administrative, financing and marketing operations. The
Boston, Massachusetts lease is for a non-cancelable period of ten years, with
three years remaining in the term, and with a base rent, as of December 31,
1996, of approximately $32,000 per month. The Boston, Massachusetts facility
adequately provides for present and future needs, as currently planned. In
addition, the Company leases regional marketing offices at an aggregate rental
of approximately $7,200 per month.
In connection with the December 1993 amendment to the Company's corporate office
lease, the Company executed a promissory note in favor of its landlord, Aetna
Casualty and Surety Company ("Aetna"), in the principal amount of $796,000 due
January 1999. The note, which does not bear interest, will be fully canceled if
the Company fulfills its remaining lease obligations without default. If the
Company defaults under the lease, the note will be accelerated and a $100,000
security deposit will be forfeited.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in the following legal proceedings:
On January 15, 1997, Chancellor filed a complaint in Superior Court,
Suffolk County, Massachusetts, alleging that certain of its former officers and
directors are liable to the corporation for losses incurred as a result of their
negligence, breach of fiduciary duties, unjust enrichment, conversion, and
unfair and deceptive trade practices. In addition, Chancellor's complaint seeks
the imposition of a constructive trust for the corporation's benefit on various
assets that Chancellor claims were wrongfully taken from the corporation by its
former officers and directors, as well as recovery of damages arising from legal
malpractice allegedly committed by the corporation's former general counsel, and
defamatory statements made by one former officer and director to certain of the
corporation's customers.
Four of the defendants, Stephen G. Morison, David W. Parr, Gregory S.
Harper and Thomas W. Killilea, have answered the complaint (denying its
allegations), and have filed a counterclaim against Chancellor, and have
commenced a third-party action against Brian M. Adley, Vestex Corporation and
Vestex Capital Corporation. The counterclaim alleges that Chancellor is liable
for breach of certain employment and severance agreements allegedly entered into
with the defendants Morison and Harper, and for the abuse of process in
connection with the corporation's initiation of this lawsuit. The third-party
complaint seeks indemnification and contribution from Adley, Vestex Corporation
and Vestex Capital Corporation in connection with the claims raised by
Chancellor in the primary action. In addition, the third party complaint seeks
recovery of damages from Adley, Vestex Corporation and Vestex Capital
Corporation for alleged abuse of process, interference with the contractual
relations and deceit. In their answer to the counterclaim the third-party
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complaint, Chancellor and the third-party defendant have denied the defendants'
allegations.
The Company is also involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS:
The Company's Common Stock has traded on the Nasdaq OTC Electronic Bulletin
Board under the symbol "CHLR" since August 21, 1996 and under the symbol "CHCR"
between January 28, 1994 and August 21, 1996 on the basis of actual trading
prices. The Company's Common Stock had traded from June 30, 1992 to January 28,
1994 on the Small-Cap Market of the Automated Quotation System of Nasdaq on the
basis of actual trading prices.
The following table sets forth the high and low sales prices of the Company's
Common Stock for the periods indicated, according to published sources.
1997 High Low
- ---- ---- ---
Second quarter (through May 15, 1997) .15 .09
First quarter .10 .04
1996 High Low
- ---- ---- ---
Fourth quarter .281 .06
Third quarter .313 .188
Second quarter .313 .188
First quarter .313 .188
1995 High Low
- ---- ---- ---
Fourth quarter .3125 .0625
Third quarter .25 .03125
Second quarter .1875 .09375
First quarter .21875 .09
On May 15, 1997, there were approximately 700 beneficial owners of the Company's
common stock.
No cash dividends were paid during the periods indicated. Under the terms of a
previous intercreditor agreement the Company was prohibited from paying any cash
dividends. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.")
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
The table on the following page sets forth selected consolidated financial data
for the periods indicated derived from the Company's consolidated financial
statements. The data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share data)
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income $ 1,933 $ 4,391 $ 7,630 $ 12,088 $ 16,882
Lease underwriting income 504 749 499 857 1,938
Total revenues 5,513 8,491 10,587 14,910 21,838
Loss from continuing
operations before change
in accounting principle* (6,804) (1,221) (3,343) (6,596) (1,878)
Net loss* (6,804) (1,221) (3,343) (5,996) (1,878)
Loss per share from
continuing operations
before change in
accounting principle ($ 1.32) ($ .22) ($ .52) ($ 1.07) ($ .33)
======== ======== ======== ======== ========
Net loss per share ($ 1.32) ($ .22) ($ .52) ($ .97) ($ .33)
======== ======== ======== ======== ========
Weighted average common and
common equivalent shares 5,136 5,634 6,373 6,174 5,709
======== ======== ======== ======== ========
<FN>
* The losses include the following unusual costs (in thousands) which materially
affect the comparability of the information above:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Residual value
estimate reductions $2,384 - - $2,524 -
Organizational res-
tructuring costs $ 524 - - - $154
</FN>
</TABLE>
13
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating leases, net $ 497 $ 1,683 $ 7,495 $ 16,792 $ 28,649
Total assets 10,462 16,088 23,165 39,741 65,548
Indebtedness:
Recourse 3,432 4,314 11,225 15,069 17,948
Non-recourse 1,188 3,167 5,205 12,390 29,433
Stockholders' equity
(deficit) (4,418) 1,365 (1,421) 1,922 6,943
CONSOLIDATED QUARTERLY STATEMENTS OF OPERATIONS DATA
(in thousands)
1996 Quarters
-------------
First Second Third Fourth
----- ------ ----- ------
Revenues $ 1,340 $ 1,521 $ 1,131 $ 1,521
Costs and expenses 1,743 1,761 1,757 7,295
Net profit (loss) (403) (240) (626) (5,535)
1995 Quarters
-------------
First Second Third Fourth
----- ------ ----- ------
Revenues $ 2,334 $ 1,957 $ 2,098 $ 2,102
Costs and expenses 3,043 2,634 2,087 1,948
Net profit (loss) (709) (677) 11 154
For a discussion of the Company's dividend policy, see Item 5, "Market for the
Company's Common Equity and Related Stockholder Matters."
For a discussion of indebtedness, see Note G of the Company's Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Revenues for the year ended December 31, 1996 decreased to $5.5 million as
compared to $8.5 million and $10.6 million for the years ended December 31, 1995
and 1994, respectively. The Company reported a net loss of $6.8 million ($1.32
per share) for 1996 as compared with a net loss of $1.2 million ($0.22 per
share) for the year ended December 31, 1995 and a net loss of $3.3 million ($.52
per share) for the year ended December 31, 1994.
Rental Income
Rental income, primarily from the Company's portfolio of leased equipment, was
$1.9 million for the year ended December 31, 1996, versus $4.4 million and $7.6
million for the years ended December 31, 1995 and 1994, respectively. Most
rental income is used to service non-recourse debt secured by leases. The
14
<PAGE>
Company had no additions of equipment in 1996, added $276,000 of equipment (at
cost) to its portfolio in 1995, and had no additions in 1994. During 1996, the
Company disposed of $11.4 million of equipment from its portfolio in the
aggregate as measured by its original cost, which coupled with the lack of
additions to the portfolio contributed to the decline in rental revenues.
In 1996, the Company voluntarily sold $1.1 million of equipment under one lease
from its portfolio prior to lease expiration (as measured by the original
equipment cost). There were no voluntary sales of leases prior to lease
expiration in 1995. In 1994, the Company voluntarily sold $3.9 million of
equipment under six leases from its portfolio prior to lease expiration (all as
measured by the original equipment cost). The voluntary portfolio sales were
made in order to generate cash to meet the Company's operating and debt service
requirements. The sale of assets from the portfolio reduces future rental income
and the associated future profits which may be derived from continued ownership
thereof. These portfolio reductions are expected to continue as the Company is
presently unable to add significantly to its portfolio due to the lack of
capital necessary to finance the required investment in leased equipment.
Lease Underwriting Income
Lease underwriting income was approximately $504,000 for the year ended December
31, 1996, $749,000 for the year ended December 31, 1995 and $499,000 for the
year ended December 31, 1994. These revenues were derived from the sale to
investors of $21 million of leased equipment in 1996, as compared to sales of
$27 million in 1995 and $14 million in 1994. Net profit margins (cash net of
interest carrying costs) derived from these sales were 1.1% for 1996, as
compared to .5% for 1995 and 1.4% for 1994. When including residual fee income,
overall profit margins were 2.43%, 2.67% and 3.68% in 1996, 1995 and 1994,
respectively. The decrease in lease equipment volume in 1996 was due to a
reduction in the origination sales efforts. Competitive factors in origination
sales has continued to keep margins at historically low levels.
At December 31, 1996 the Company held in its inventory $1.2 million (original
cost) of lease transactions for sale to third parties as compared to $1.9
million at December 31, 1995. Management believes that the Company is not
limited in its capacity to originate and sell equipment lease transactions by
lack of lessee transaction opportunities or institutional investors seeking
transactions in which to invest.
Residuals. Lease underwriting income includes the present value of the Company's
share of the estimated future residual values expected to be realized from lease
transactions sold to investors. For the year ended December 31, 1996, the
Company recognized as residual fee income $268,000 derived from the sale of $21
million of equipment to investors. By comparison, for the years ended December
31, 1995 and 1994, the Company recognized as residual fee income $605,000
derived from the sale of $27 million of equipment to investors, and $300,000
derived from the sale of $14 million of equipment. As of December 31, 1996, the
Company's share of residual values which it expects to receive in the future
from the disposition of equipment owned by investors was $.75 million as
compared to $3.3 million at December 31, 1995.
The Company engages in a continuing review of its valuation of all equipment in
its portfolios or under management. It monitors the relative performance of its
disposal methods including both the release and sale of assets on a monthly
basis comparing results to established residual accounting policies. Every asset
is tracked to its ultimate disposition and all out-of-pocket costs are netted
against gross revenues realized. Through fiscal 1995, the Company established
its accounting residual values based on a number of criteria including: (1) long
term (generally 10 years) variances from mean value in the used fleet equipment
market; (2) specific asset characteristics including specifications, use and
cost; (3) the Company's own asset disposition experience which includes over
10,000 units; and (4) external assessor of fleet assets including the "Blue
Book" guide, auction results, and retail classified advertisements. In fiscal
1996, as a result of changes in market conditions as they relate to these fleet
assets, the Company placed additional emphasis on reports by a qualified
external assessor. Accordingly, the Company periodically monitors performance
against these measures in order to determine if adjustments in residual values
are necessary.
15
<PAGE>
During the fourth quarter of 1996, the Company recognized a $2.4 million
reduction in estimated future residual values of certain assets, primarily
relating residuals. The residual adjustment was the result of changes in (i)
current market conditions for used equipment, and particularly used
transportation equipment, resulting from regulatory and technological changes,
use patterns, maintenance costs and competitive margins associated with the
revenue-generating capability of such assets and (ii) factors affecting the used
transportation equipment market and the economy generally leading to dramatic
variances in rates of inflation on new equipment. Substantially all of the
residual write-down for the year 1996 was associated with equipment leased and
sold to investors by the Company prior to 1996. The Company effected no
reductions in its estimated future residuals during 1995 or 1994.
The Company continues to build a remarketing distribution system relying on used
truck dealers to supplement the Company's own sales and telemarketing group. The
remarketing operation is generally unaffected by the Company's financial
difficulties.
Gains from Portfolio Remarketing. Gains from portfolio remarketing are realized
when equipment initially subject to a lease in the Company's direct finance or
operating lease portfolio is sold at a price above its book value. Gains from
portfolio remarketing fluctuate principally because of the value of equipment
which becomes available each year at lease expiration, changes in the used
equipment market, particularly for fleet assets, and the Company's performance
in remarketing the equipment.
In 1996, gains decreased 36% versus the prior year to $1.4 million on sales of
equipment with an original cost of $11.4 million, a 120% performance increase
based on original cost as compared to 1995 where gains were $2.2 million on
sales of equipment with an original cost of $22.9 million. The 1995 performance
represented a 254% increase compared with 1994 gains of $633,000 on sales of
equipment with an original cost of $17.4 million.
Fees from Remarketing Activities. Fees from remarketing activities are realized
when the Company releases or sells equipment owned by others, including
equipment under leases previously sold by the Company to investors. Gross fees
are netted by any residual values previously booked by the Company. Gains from
remarketing activities fluctuate because of the value of equipment which becomes
available each year from leases previously sold by the Company, the terms of new
contracts to remarket equipment on behalf of others, changes in the used
equipment market, and the Company's remarketing performance.
In 1996, fees from this source were $820,000, an increase of 23% as compared to
1995. The increase is due to slightly higher volume of activity and values for
the equipment. In 1995, fees from this source were $668,000, a decrease of 42%
as compared to 1994 when fees were $1,160,000. The decline is due to a lower
volume of activity as well as lower values for the equipment.
TruckScan - Results from Operations. During 1996, the Company invested $350,000
in TruckScan, a 50/50 joint venture initiative. Chancellor executed a $300,000
non-interest bearing loan agreement pursuant to which $107,000 of working
capital was advanced. Chancellor's total investment in this joint venture,
including expenses incurred monitoring the investment and administrative
support, was approximately $1.2 million. For the year ended December 31, 1996,
Truckscan had gross revenues of approximately $26,000 with losses of
approximately $420,000. On May 1, 1997, the Company divested itself of this 50%
joint venture.
Expenses. Selling, general and administrative expenses for the year ended
December 31, 1996 amounted to $8.6 million versus $5.2 million for the year
ended December 31, 1995 and $5.3 million for the year ended December 31, 1994.
The significant increase in 1996 expenses is attributable primarily to
consulting and financing expenses of $2.2 million payable to Vestex. In
addition, $524,000 was recorded pursuant to a restructuring plan as adopted by
the Company's Board of Directors in December 1996. Restructuring charges
recorded as of December 31, 1996 include costs to exit the current facility and
other costs to implement the restructuring plan.
16
<PAGE>
Interest expense for the year ended December 31, 1996 was $480,000 versus $1.0
million and $2.1 million, for the years ended December 31, 1995 and 1994,
respectively. These decreases have resulted largely from the reduction in the
size of the Company's portfolio and the corresponding substantial reduction in
non-recourse debt, as well as the elimination of $3.5 million of subordinated
recourse debt as part of the July 1995 recapitalization transaction described in
"Liquidity and Capital Resources."
Depreciation and amortization expenses decreased to $1,042,000 for the year
ended December 31, 1996 from $3.4 million and $6.4 million, for the years ended
December 31, 1995 and 1994, respectively. The decrease is directly attributable
to the decrease in the size of the Company's operating lease portfolio.
Income Taxes. The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." This statement requires recognition of deferred assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
assets and liabilities are determined based on the differences between the
financial statements and the tax basis of assets and liabilities using enacted
tax rates. During 1996, income tax benefit of $239,000 was recognized which
resulted from deferred tax benefit of $400,000 and current tax provisions of
$161,000. There was no provision for income taxes for the year ended December
31, 1995. During 1994, a state tax provision of $9,000 was recognized.
Summary. The net after-tax losses incurred by the Company are the result of many
of the items discussed in the preceding paragraphs. In order for the Company to
regain and maintain profitability and to generate positive cash flow, costs must
continue to be managed; the volume of leased equipment underwritten and sold
must grow; margins obtained from those sales must remain relatively stable or
increase; residual realization must be sustained relative to recorded values;
warehouse financing must be sufficient to permit the Company to meet its current
operating requirements; and the Company must generate brokerage and other
service fees by capitalizing on its remarketing strengths. Steps continue to be
taken to address each of these requirements, and management believes that,
assuming the addition of new capital for investment in the Company's portfolio
and for investment in certain remarketing and other business operations, the
Company will be able to make progress in 1997 toward an eventual return to
sustained profitability.
Liquidity and Capital Resources
The Company has four principal sources of financing: (1) an intercreditor loan,
(2) a secured inventory loan, (3) a non-recourse inventory loan facility, and
(4) a subordinated loan.
The intercreditor loan had a balance of approximately $1,000,000 as of December
31, 1996. Repayment of the loan is secured by virtually all assets of the
Company not otherwise encumbered. The intercreditor loan was renewed on January
7, 1997 (subsequent to a $500,000 cash infusion by Vestex) and represents the
final term-out of the intercreditor loan and provides for the full repayment of
the debt as a term loan in fixed monthly principal payments through November 25,
1997. During each renewal period, the intercreditor lender group agreed to
refrain from exercising certain rights under their original individual loan
agreements in exchange for the Company's agreements to (a) make principal and
interest payments as agreed, (b) secure the continued subordination by another
lender, and (c)operate within other covenants typical for this type of
financing, including a prohibition on payment of dividends and restrictions on
capital spending. Interest rates under the current renewal agreement are all at
a floating rate of prime plus 2%.
A secured inventory loan of $1.7 million as of December 31, 1996 is provided by
the same intercreditor lender group. Although the inventory loan has
historically been renewed on the same basis as the term loan described above,
the current renewal requires that the inventory loan be fully repaid by November
25, 1997. This inventory loan is secured by either cash or equipment subject to
leases. This facility allows the Company to purchase equipment subject to a
lease before selling the transaction to an investor. The interest rate is prime
plus 2%.
17
<PAGE>
In April 1997, the Company's CEO executed and delivered (1) the Loan Reduction
and Purchase and Assignment Agreement dated as of April 1997 among the Company,
its corporate affiliates and/or subsidiaries, Fleet National Bank- Corporate
Trust Division, as agent (the "Agent") for the Company's principal recourse
lenders, and Vestex; (2) Release in favor of the principal recourse lenders to
be given by Vestex and Brian Adley individually; (3) Release in favor of the
principal recourse lenders to be given by the Company, its corporate affiliates
and/or subsidiaries; and (4) $1,500,000 Secured Promissory Note given by the
Company, its corporate affiliates and/or subsidiaries in favor of Vestex.
In April 1997, both the intercreditor loan and the secured inventory loan were
repaid in advance of their respective terms. The aggregate amount of this debt
on the repayment date was approximately $1,906,000 of which approximately
$976,000 was paid in cash and the balance of $930,000 was forgiven. In addition,
the Company paid approximately $22,000 in legal and bank fees to complete this
transaction.
The Company also has a non-recourse loan facility which supplements the secured
inventory loan described above. The non-recourse loan facility provides for the
financing of the discounted lease stream and a portion of the residual value of
the equipment subject to those leases. Loans under this facility are subject to
the lender's approval of the lessees' credits and collateral lease
documentation, bear interest at 2% over the prime rate, and are payable within
180 days of each borrowing, unless the lender extends the maturity date or
exercises its right to convert the loan into a long-term non-recourse loan. This
credit line provides a maximum financing capacity of $10 million. As of December
31, 1996, there was no outstanding balance under this facility.
In February 1997, the Board of Directors approved the issuance of 3,000,000
shares of the Company's preferred stock at $.30 per share to Vestex in
consideration of $900,000 of consulting fees due Vestex. In addition during the
first quarter of 1997, the Company received loans from VCC of approximately
$250,000 which are due on demand.
The Company's ability to underwrite equipment lease transactions is largely
dependent upon the continuing availability of short-term warehouse lines of
credit. Management is engaged in a continuing dialogue with several possible
alternative inventory lenders which appear to be interested in providing the
Company with warehouse financing. If the Company were to lose either of its
existing credit lines, or if their availability were reduced, the Company would
take immediate steps to replace either or both of them with one or more
alternative warehouse facilities. If the Company experienced unexpected delays
in putting a new warehouse facility in place, it would temporarily disrupt the
Company's ability to underwrite new equipment leases until the new warehouse
financing was secured.
The Company also has a subordinated loan of $200,000 due to its former majority
stockholder ("Bruncor") and a $500,000 loan from its current majority
stockholder, Vestex.
On May 19, 1997 the Company issued a $1.5 million promissory note to the Vice
Chairman of the Board which was also guaranteed by the Chairman of the Board.
The promissory note bears interest at the prime rate plus 2 1/8% (10 3/8% at May
19, 1997). The Company is also in the process of negotiating an additional $2.5
million loan with a bank which will be guaranteed by the Chairman of the Board
and Vestex, and an additional $2.5 million warehouse credit facility with a
financing institution owned by the Vice Chairman of the Board. Although there
can be no assurance that such financing will occur, management is confident that
these additional financing transactions can be closed by June 1997.
The Company's operating lease portfolio is principally responsible for enabling
the Company to sustain its operations from 1990 to the present in that it has
provided a source of collateral security and, through lease sales and residual
disposition, liquidity to meet the demands of its lenders while also
contributing towards the Company's working capital requirements. The Company
believes that its financial crisis from 1990 through 1996 resulted from the
withdrawal of financial support by the Company's former majority shareholder,
Bruncor, and the inability to properly allocate capital resources and adjust and
contain general and administrative costs to levels commensurate with the decline
in revenues.
18
<PAGE>
Since 1990, the Company's ability to sustain its operations and meet its ongoing
working capital requirements has been exclusively dependent upon the continued
availability of internally generated cash arising primarily from lease
underwriting and brokerage fees and residual value realization.
The remarketing of equipment has played and will continue to play a vital role
in these activities. In connection with the sale of lease transactions to
investors, the Company typically is entitled to share in a portion of the
residual value realized upon remarketing. Successful remarketing of the
equipment is essential to the realization of the Company's interest in the
residual value of its managed portfolio. It is also essential to the Company's
ability to recover its original investment in the equipment in its own
portfolios and to recognize a return on that investment.
The Company has found that its ability to remarket equipment is affected by a
number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of the remarketing.
Remarketing efforts are pursued on a direct retail sale or lease basis. The
Company's fleet equipment remarketing experience has shown that generally the
greatest residual value is realized by initially re-leasing equipment, rather
than immediately selling it. Therefore, the Company has concentrated its
remarketing efforts on re-leasing, although re-leasing involves more risks than
selling because lessees of used equipment are generally smaller, less
creditworthy enterprises than the Company's initial lessees. The Company has
also enjoyed success selling fleet equipment through its retail sales centers,
which the Company plans to further develop. The Company is also devoting
resources to the development of international remarketing capabilities.
Prior to 1996, the net result of these improvements in its remarketing
activities has been an improvement in the residual values that the Company
actually realizes for the benefit of itself and its investors from its fleet
equipment dispositions. During 1996, the Company realized reduced cash flows due
to declining volumes of equipment reaching lease expiration in 1996. The
historical volume and cash flow from this activity follows:
Cash Flow to the Company from Remarketing
(in millions except unit numbers)
Company's
Year Units Remarketed Original Cost Portfolio Trusts* Total
- ---- ---------------- ------------- --------- ------- -----
1996 1,540 $71.4 $1.4 $1.3 $2.7
1995 2,265 $87.7 $5.7 $1.1 $6.8
1994 3,063 $89.4 $3.0 $2.3 $5.3
1993 1,817 $60.5 $2.0 $1.8 $3.8
1992 1,997 $44.5 $2.6 $ .5 $3.1
1991 1,332 $44.7 $3.6 $ .5 $4.1
1990 974 $43.0 n.a. n.a. n.a.
- -----------------------------
*The Company shares in the benefits of remarketing activities with the investors
in these trusts as described under "Lease Underwriting Income", "Residuals" and
"Fees from Remarketing Activities" above. The amounts reflected in the Trusts
column represent net fees and residual sharing paid to the Company by the
trusts.
Due to declining volumes of equipment reaching lease expiration in 1997, the
Company estimates, based on various assumptions including its ability to sustain
recent levels of performance, that cash flow from remarketing assets will be
approximately $900,000 less in 1997 than the $2,700,000 realized in 1996. The
Company anticipates continuing to dedicate substantial resources toward the
19
<PAGE>
further development and improvement of its remarketing capabilities and believes
that remarketing will increasingly become a profit center for the Company. The
Company's strategy is to further exploit its remarketing expertise by continuing
to develop its ability to sell remarketing services to other lessors, fleet
owners, and lessees and also to create a dealer capability under which the
Company would buy and re-sell fleet equipment. The Company is also implementing
a plan to expand its brokerage activities through the Internet and the use of
other information technologies. In addition to dedicating existing personnel and
resources to this activity, the Company recently hired an experienced used fleet
equipment buyer to oversee this dealer function, including identifying
attractive used equipment purchase and sale opportunities.
While external funds such as short-term warehouse financing and non-recourse
debt to finance the discounted present value of the lease payments have been
consistently available to finance equipment, other sources of funds (notably
investment capital to fund the equity portion of its leases) were inadequate to
meet the Company's needs from 1988 through early 1990. In April 1990, the
Company and most of its unsecured recourse lenders signed a four-month
intercreditor agreement which restructured approximately $25.9 million of
outstanding loans. This intercreditor agreement called for granting of security
interests in the Company's unencumbered assets, collateralization of the
outstanding balances of the restructured credit facilities, and the forbearance
of the loan balances. Since April 1990, the intercreditor agreement has been
amended and extended 26 times, most recently for an eleven-month period expiring
November 25, 1997, which will fully amortize the intercreditor loan. The
extension agreements have included negotiated monthly debt service terms and
working capital allotments available to the Company according to the projected
revenues and cash requirements of the Company during the periods covered by
these agreements. The Company reduced the principal balance of the forborne
indebtedness by $1.3 million during 1996 to $995,000 as of December 31, 1996. On
April 1997, the intercreditor loan and secured inventory loan were repaid in
advance of their terms through the payment of $976,000 in cash and forgiveness
of the remaining debt in the amount of $930,000.
On April 12, 1996, the Company closed a restructured preferred stock transaction
with Vestex whereby it issued 5,000,000 shares of a newly authorized Series AA
Convertible Preferred Stock to Vestex Capital Corporation in exchange for the
infusion of $1.35 million of new capital into the Company, less reimbursement of
approximately $312,500 of due diligence and other transactional costs pursuant
to Amendment No. 4 to the Recapitalization and Stock Purchase Agreement entered
into by the Company and Vestex. Additionally, Vestex forgave proposed but
undeclared dividends of $1,150,000.
The Company's Board and management continue to believe that the Company requires
new equity capital in order to resume a strategy of portfolio investment which
it had successfully pursued during the 1980's as well as to invest in certain
remarketing and other business operations. The Company is actively pursuing
negotiations with various financing sources, including an investment banker, for
purposes of raising the needed equity capital.
A significant portion of the Company's assets is pledged as collateral for the
Company's non-recourse indebtedness. As of December 31, 1996, approximately $3.4
million (or 74.3%) of indebtedness represented a direct liability of the
Company; the remainder, approximately $1.2 million (or 25.7%), was non-recourse.
Amounts due under non-recourse notes are obligations of the Company which are
secured only by the leased equipment and assignments of lease receivables, with
no recourse to any other assets of the Company. The significant near-term
maturities of this non-recourse debt (see Note G to the Footnotes to the
Financial Statements) are not expected to affect the Company's liquidity because
the debt is expected to be fully amortized by the assignment of the collateral
leases and payment by the related lessees of lease rentals directly to the
non-recourse lenders. The availability of the leased equipment for remarketing
following termination of the leases and retirement of the non-recourse debt is
expected to produce residual income which would improve the Company's liquidity.
Cash and cash equivalents amounted to $21,000 at December 31, 1996 as compared
to $185,000 at December 31, 1995. Cash restricted and escrowed amounted to $3.6
million at December 31, 1996 and $4.5 million at December 31, 1995. Withdrawals
of restricted cash balances are confined to debt service and working capital
20
<PAGE>
allotments, whereas the use of escrowed balances is confined to debt service
payments.
Restricted balances represent funds collected by the Company on behalf of trust
investors consisting of rental income and sales proceeds related to leases in
which they have an equity interest. A related liability exists on the balance
sheet until the funds have been distributed to the appropriate investors. The
related liability of approximately $2.6 million is included in "Accounts Payable
and Accrued Expenses" as of December 31, 1996. A sum of approximately $900,000
is confined to debt service, working capital allotments and equipment purchases.
In December 1993, in connection with the consolidation of its office space and
renegotiation and amendment of its corporate office lease, the Company paid a
$100,000 security deposit and executed a promissory note in favor of its
landlord in the principal amount of approximately $800,000 due January 1999. The
note, which does not bear interest, will be fully canceled if the Company
fulfills its remaining lease obligations without default. If the Company
defaults under the lease, the note will be accelerated and the security deposit
will be forfeited. In connection with the Restructuring, which includes the
Company's plans to relocate to a more economical facility, these costs have been
charged as restructuring costs. While no assurances can be given, management
believes that the Company will continue to perform its obligations, including
the timely payment of rent, under its amended lease throughout the remaining
term, provided that the Company will return to profitable operations in the
future.
Recent Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." This standard requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adopting SFAS No.
121 had no significant impact on the 1996 consolidated financial statements.
In June 1996, Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125), was issued. SFAS 125 establishes accounting and
reporting standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS 125 is effective for
transfers of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No 125," (SFAS 127) was issued. This statement changes the effective date of
certain provisions of SFAS 125 to transfers occurring after December 31, 1997.
The Company is currently evaluating the impact of SFAS 125 and 127 on the
consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". SFAS 128 specifies required disclosures relating to
earnings per share data. SFAS No. 128 is effective for fiscal years ending after
December 15, 1997 and earlier application is not permitted. The implementation
of this standard is not expected to materially affect the Company's consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The financial statements and financial statement schedules are incorporated in
this report on Pages F-1 through F-22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
On December 26, 1996, the Company received a letter from Deloitte & Touche LLP
(Deloitte & Touche) indicating that the client-auditor relationship between
Chancellor Corporation and Deloitte & Touche had ceased. The appointment of
Reznick Fedder & Silverman was effective on February 18, 1997.
21
<PAGE>
The reports of Deloitte & Touche on the Company's Consolidated Financial
Statements for the past two years expressed an unqualified opinion and included
an explanatory paragraph relating to the Company's ability to continue as a
going concern.
In connection with the audits of the Company's consolidated financial statements
for each of the two years ended December 31, 1995, and in the subsequent interim
period, there were no disagreements with Deloitte & Touche on any matters of
accounting principles or practices, financial statement disclosures, or auditing
scope and procedures which, if not resolved to the satisfaction of Deloitte &
Touche, would have caused Deloitte and Touche to make reference to the matter in
its report.
During the Company's two most recent completed years and the subsequent interim
period preceding the engagement of Reznick Fedder & Silverman through the
present date, there were no reportable events (as defined in item 304 of
Regulation S-K) with Deloitte & Touche and during such periods the Company did
not consult with Reznick Fedder & Silverman regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
Name Age Position(s) Held
John J. Powell 55 President, Chief Executive Officer and Treasurer
Brian M. Adley 34 Director; Chairman of the Board
Ernest Rolls 72 Director; Vice Chairman of the Board
Rudolph Peselman 52 Director
Michael Marchese 49 Director
The directors are elected at each annual meeting of the stockholders to serve
for a term of one year and until their successors are elected and have
qualified.
There are no family relationships between any director, executive officer or
person nominated or chosen to become a director or executive officer.
Business Experience of Executive Officers and Directors
Mr. Powell joined the Company in December 1996 as President and Chief Executive
Officer. Prior to joining the Company, Mr. Powell was the President and Founder
of EBEC Financial Corporation, a privately held equipment leasing firm
specializing in medium to large lease financial transactions. From 1971-1980 Mr.
Powell was with ITEL Corporation (NYSE) where he became the president of the
Computer Finance Division. This division of ITEL originated over $300 million of
lease finances annually and Mr. Powell managed a sales and support staff of 150
people responsible for origination, municipal finance and portfolio management
and remarketing. Mr Powell began his business career in 1967 with the IBM
Corporation serving in various marketing positions for the Data Processing
Division.
Mr. Adley has been Chairman and Chief Executive Officer of Vestex Corporation, a
private financial services firm, since its inception in 1994. Mr. Adley
previously served as Treasurer, Chief Financial Officer and a director of
Sanborn, Inc., a publicly held company involved in the manufacturing of
environmental separation systems recycling oils and coolants, from 1990 through
1993, having previously been acting Chief Financial Officer of that company
since 1989. Sanborn filed for protection from creditors under U.S. bankruptcy
laws in January 1994. From 1985 to 1989, Mr. Adley was a Senior Consultant at
Price Waterhouse. Mr. Adley was elected a director of the Company on July 25,
1995 and elected Chairman of the Board of Directors on December 3, 1996. Mr.
Adley has several undergraduate degrees in accountancy and management, and a
Masters of Business Administration and a Juris Doctorate.
Mr. Rolls was elected a director in December 1996. Since 1973 he has been
President and Director of Asset Funding Group, Inc., a company that invests and
directs joint ventures with national corporations. From 1960 to 1973, Mr. Rolls
was President of Diamond Lighting and was Founder and Chairman of the Board of
Wright Airlines from 1966 to 1968.
Mr. Peselman was elected a director in December 1996. He has been President and
Director of Kent International, an international business development and
consulting company since 1989. Mr. Peselman was Vice President of Eric
Management, a real estate development and management company, from 1976 to 1989
and had served as a director of Engineering Firm, a firm which managed technical
reconstruction of a furniture manufacturing facility in the Ukraine, from 1970
to 1988.
Mr. Marchese was elected a director in December 1996. He has extensive domestic
and international leasing and bank experience. From 1996 to the present he has
been President and Founder of Long River Capital; from 1993 to 1996 he was a
Consultant for Marchese & Company; from 1979 to 1993 he was with SNET Credit,
Inc. in a variety of analyst and management positions; and prior to 1979 he
23
<PAGE>
served in a variety of staff and management positions with various trust,
leasing and bank companies. Mr. Marchese has an undergraduate degree from
Providence College.
Certain Exchange Act Reporting Matters
Vestex Corporation filed a Form 4 on August 19, 1996 disclosing the transfer of
1,600,000 shares of the Company's common stock. Vestex Capital Corporation filed
a Form 3 on August 19, 1996 disclosing the acquisition of 1,600,000 shares of
the Company's common stock and 5,000,000 shares of the Company's Series AA
Convertible Preferred Stock. Brian M. Adley filed a Form 4 on August 19, 1996
disclosing that he is the controlling stockholder of Vestex Capital Corporation,
the direct beneficial owner of 1,600,000 shares of the Company's common stock
and 5,000,000 shares of the Company's Series AA Convertible Preferred Stock.
John J. Powell filed a Form 3 that he had become an executive officer of the
Company on November 22, 1996. Rudolph Peselman and Michael Marchese each filed a
Form 3 on May 22, 1997 disclosing that they are directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION:
The annual and long-term remuneration paid to or accrued for the Chief Executive
Officer and each of the other five most highly compensated executive officers of
the Company for services rendered during the year ended December 31, 1996, and
the annual and long-term remuneration paid to or accrued for the benefit of the
same individuals, for services as executive officers of the Company during the
years ended December 31, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
Securities
Annual Compensation Underlying All Other
Name and Principal Salary Bonus(1) Options Compensation
Position Year $ $ (#) ($)
- ------------------ ---- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
John J. Powell(2)(10) 1996 15,000 - - 500 (3)
Chief Executive Officer 1995 - - - -
1994 - - - -
Stephen G. Morison(4)(10)1996 423,275 - - 1,100 (5)
Chief Executive Officer 1995 225,000 32,250 435,500 1,036 (-) (5)
1994 225,000 14,900 - 1,419 (3) (5)
Michael DeSantis, Jr.(6) 1996 174,772 30,744 - 1,165 (3) (5)
Senior Vice President(10) 1995 130,000 43,389 175,000 1,108 (3) (5)
1994 130,000 44,209 - 1,042 (3) (5)
William J. Guthlein(7)(10) 1996 134,152 - - 1,155 (3) (5)
Vice President 1995 125,660 9,300 110,000 1,076 (3) (5)
1994 125,660 7,540 - 996 (3) (5)
David W. Parr(8)(10) 1996 99,300 - - 1,108 (3) (5)
Vice President 1995 111,300 9,350 110,000 1,262 (3) (5)
1994 111,300 6,678 - 1,198 (3) (5)
Gregory S. Harper(6) 1996 132,287 14,173 - 1,133(3)(5)
Vice President(10) 1995 90,000 24,490 110,000 1,053(3)(5)
1994 90,000 10,385 - 965(3)(5)
Kevin Kristick(9) 1996 173,889 32,111 - 500(3)
Vice President(10) 1995 86,154 93,758 15,000 500(3)
1994 36,615 29,605 * 500(3)
- ------------------------
<FN>
* see 1996 proxy for previous information
24
<PAGE>
(1) Includes commissions paid under the Company's incentive program for sales
personnel.
(2) Employment commenced November 22, 1996.
(3) Includes $500 paid by the Company during the fiscal year with respect to
the Company's 401-K plan.
(4) Employee resigned effective December 3, 1996.
(5) Except as otherwise indicated for those individuals covered by note (3),
this amount is the dollar value of insurance premiums paid by the Company
during the fiscal year with respect to term life insurance for the benefit
of the named executive officer. This amount excludes amounts paid by the
Company with respect to group life policies.
(6) Employment contract expired January 24, 1997 and not renewed.
(7) Employment terminated January 10, 1997.
(8) Employee resigned September 13, 1996.
(9) Employment contract expired December 31, 1996 and not renewed.
(10) Represents the amount paid as Salary in 1996 as reflected on the
individual's 1996 W-2 statement filed with the Department of the
Treasury-IRS
</FN>
</TABLE>
25
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
Table not included because no options were granted during 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number Value of
Of Securities Unexercised
Shares Underlying Unex- In-the-Money
Acquired Exercised Options Options
On Value At FY-End(1) At FY-End ($)
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
- ---- -------- -------- ------- ------- ------- -------
John J.
Powell 0 0 - - - -
Stephen G.
Morison 0 0 435,500 - - -
Michael
DeSantis, Jr. 0 0 175,000 - - -
William J.
Guthlein 0 0 55,319 54,681 - -
David W.
Parr 0 0 - - - -
Gregory S.
Harper 0 0 110,000 - - -
Kevin
Kristick 0 0 7,543 - - -
- ---------------
(1) Adjusted to reflect the inclusion of a dividend declared on December 17,
1994 on the Company's outstanding Common Stock payable on shares held of record
on January 6, 1995 in the form of shares of such Common Stock at the rate of
0.475 new shares for each outstanding share.
Directors' fees in the aggregate amount of $18,750 were paid to or accrued for
the directors with respect to services rendered during the year ended December
31, 1996, excluding $4,250 of directors' fees accrued with respect to prior
fiscal periods that were paid during the year ended December 31, 1996. Directors
no longer receive any cash fees with respect to services rendered. The only
compensation that directors of the Company currently receive is the grant of
stock options pursuant to the Company's 1994 Director's Stock Option Plan. Under
that plan, as amended, non-employee directors elected prior to December 31, 2004
may be granted options at the discretion of the Option Compensation Committee
subject to the availability of an adequate number of shares of Common Stock
reserved for issuance under the Plan. There are currently 235,500 options
available for issuance.
In January 1995, the shareholders, at a special meeting, approved the adoption
of an 18 month severance policy for key employees. The Company's prior
management and the previous board further extended this policy to January 1,
1997.
Effective January 1, 1997, the Company's severance benefit policy covering the
Company's executive officers and other employees was terminated. Employment
agreements between the Company and Messrs. Morison, DeSantis and Harper which
were entered into in connection with the July 1995 Vestex transaction expired
on January 24, 1997 and none of the agreements were renewed.
26
<PAGE>
The information required by Item 402(i), (j), (k) and (l) of Regulation S-K
regarding executive compensation will be set forth in the Proxy Statement for
the Annual Meeting of Stockholders is expected to be held on August 29, 1997 at
2:00 p.m., and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The number of shares of Common Stock beneficially owned by the persons or
entities known by management to be the beneficial owners of more than 5% of the
outstanding shares, the number of shares beneficially owned by each director,
each nominee for election or re-election as a director and each executive
officer, and the number of shares beneficially owned by all directors and
officers as a group, as of May 15, 1997, as "beneficial ownership" has been
defined under rules promulgated by the Securities and Exchange Commission, and
the actual sole or shared voting power of such persons, as of May 15, 1997, are
set forth in the following table:
Name and Common Stock Percentage
Address of Beneficially of Shares Voting Power(1)
Beneficial Owner Owned Outstanding Shares Percentage
- ---------------- --------------- ----------- ------ ----------
Vestex Capital 9,600,000(3) 73.1 9,600,000(3) 73.1
Corporation(2)(10)
Brian M. Adley(2) 9,775,000(3)(4)(5) 73.4 9,600,000(3)(4) 73.1
John J. Powell(6) 0 * 0 *
Rudolph Peselman(7) 100,000(5) * 0 *
Michael Marchese(8) 100,000(5) * 0 *
Ernest Rolls(9)(10) 100,000(5) * 0 *
Directors and
Executive
Officers as a
Group (5 persons) 10,075,000(3)(4)(5) 74.0 9,600,000(3)(4) 73.1
- ---------------
*Less than one percent (1.0%)
(1) Number of votes which each person is entitled to cast expressed as a number
and as a percentage of all votes which all stockholders are entitled to
cast at the Meeting; assumes no exercise of stock options.
(2) This stockholder's address is 12 Waltham Street, Lexington, MA 02173.
(3) Assumes conversion of 8,000,000 shares of Outstanding Series AA Preferred
into a like number of shares of Common Stock.
(4) Includes all shares owned by Vestex Capital Corporation reported above. Mr.
Adley has sole or shared voting power as to all such shares.
(5) Includes 175,000, 100,000, 100,000, and 100,000 shares which Mr. Adley, Mr.
Peselman, Mr. Marchese and Mr. Rolls, respectively, are entitled to acquire
through the exercise of outstanding stock options prior to December 1997.
(6) This person maintains a business address c/o the Company.
(7) This person maintains a business address c/o Kent International, II Newton
Place, Suite 150, Brookline, MA 02158.
(8) This person maintains an address at 5 Hill Circle, Trumbull, CT 06611.
27
<PAGE>
(9) This person maintains an address at 5760 NW 22nd Avenue, Boca Raton, FL
33496.
(10) Approximately 3,500,000 shares are subject to an agreement pursuant to
which the shares may be transferred to a company controlled by Ernest L.
Rolls, Vice Chairman of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by Item 404 of Regulation S-K will be set
forth in the Proxy Statement for the Annual Meeting of Stockholders to be held
on August 29, 1997 at 2:00 p.m., and is incorporated herein by this reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as a part of this report on Form 10-K:
(1) Financial Statements: Page No.
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules:
None
All schedules are omitted because they are not applicable, not
required, or because the required information is included in
the consolidated financial statements.
(3) Exhibits:
3(a) Restated Articles of Organization of the Company (incorporated by
reference from Exhibit 3A to the Company's Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on July 22,
1983 (Registration Statement)), as amended by Articles of Amendment
filed with the Massachusetts Secretary of State on May 18, 1990
(incorporated by references from Exhibit 3(a) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1991) and by
Articles of Amendment filed with the Massachusetts Secretary of State
on January 26, 1995 (incorporated by reference from Exhibit 3(a) to the
Company's Annual Report, Form 10-K, for the year ended December 31,
1994).
3(b) By-laws of the Company, as amended to date (incorporated by reference
from Exhibit 3(b) to the Company's Annual Report, Form 10-K, for the
year ended December 31, 1994).
10(a) Lease dated June 8, 1988 between Arthur DiMartino, Trustee of 745
Atlantic Realty Trust and the Company (incorporated by reference from
Exhibit 10M to the Company's Annual Report, Form 10-K, for the fiscal
year ended March 31, 1988), as was provisionally amended by a proposal
letter dated June 11, 1990, from Richard A. Galvin to Stephen G.
Morison (incorporated by reference from Exhibit 10(g) to the Company's
Annual Report, Form 10-K, for the year ended December 31, 1990); First
Amendment to Lease, dated as of June 5, 1992, between the Company and
The Aetna Casualty and Surety Company (incorporated by reference from
Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on July 6, 1992 and dated June 23, 1992); and
Second Amendment to Lease, dated as of December 8, 1993, between the
Company and The Aetna Casualty and Surety Company (incorporated by
reference from Exhibit 1 to the Company's Form 8-K filed with the
Securities and Exchange Commission on January 24, 1994 and dated
December 8, 1993).
29
<PAGE>
10(b) Loan Agreement dated as of April 6, 1990 between Shawmut Bank, N.A. -
Corporate Trust Division, as agent ("Agent"), and the Company,
Chancellor Fleet Corporation, Chancellor Acquisition Corporation,
Chancellor Asset Management Corporation, Chancellor Financial lease,
Inc., Chancellor Credit, Ltd., Valmont Financial Corporation and
Valmont Credit Corp. ("Borrowers") (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1989), as amended by Amendment No. 1 to Loan
Agreement dated as of May 16, 1990 between Agent and Borrowers,
Amendment No. 2 to Loan Agreement dated as of June 12, 1990 between
Agent and Borrowers, Amendment No. 3 to Loan Agreement dated as of July
9, 1990 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1990), Amendment and Extension Agreement dated as of
July 30, 1990 between Agent and Borrowers (incorporated by reference
from Exhibit 28A to the Company's Quarterly Report, Form 10-Q, for the
quarter ended June 30, 1990) Amendment No. 5 to Loan Agreement dated as
of October 15, 1990 between Agent and Borrowers (incorporated by
reference from Exhibit 10(j) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1990), Second Amendment and Extension
Agreement dated as October 31, 1990 between Agent and Borrowers
(incorporated by reference from Exhibit 3 to the Company's Form 8-K
filed with the Securities and Exchange Commission on November 1, 1990
and dated October 25, 1990), Third Amendment and Extension Agreement
dated as of January 31, 1991 between Agent and Borrowers by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on February 8, 1991 and dated January 31, 1991),
Fourth Amendment and Extension Agreement dated as of April 30, 1991
between Agent and Borrowers (incorporated by reference from Exhibit 2
to the Company's Form 8-K filed with the Securities and Exchange
Commission on May 2, 1991 and dated May 1, 1991), Fifth Amendment and
Extension Agreement dated as of July 31, 1991 between Agent and
Borrowers (incorporated by reference from Exhibit 2 to the Company's
Form 8-K filed with the Securities and Exchange Commission on August
12, 1991 and dated July 19, 1991), Sixth Amendment and Extension
Agreement dated as of September 18, 1991 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on September 25, 1991
and dated September 18, 1991), Seventh Amendment and Extension
Agreement dated as of November 19, 1991 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on November 25, 1991
and dated November 19, 1991), Eighth Amendment and Extension Agreement
dated as of March 19, 1992 between Agent and Borrowers (incorporated by
reference from Exhibit 10(j) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1991), Ninth Amendment and Extension
Agreement dated as of May 5, 1992 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on May 14, 1992 and
dated May 5, 1992), Tenth Amendment and Extension Agreement dated as of
August 4, 1992 between Agent and Borrowers (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on August 14, 1992 and dated August 4, 1992),
Eleventh Amendment and Extension Agreement dated as of November 5, 1992
between Agent and Borrowers (incorporated by reference from Exhibit 2
to the Company's Form 8-K filed with the Securities and Exchange
Commission on November 16, 1992 and dated November 5, 1992), Twelfth
Amendment and Extension Agreement dated as of February 5, 1993 between
Agent and Borrowers (incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
February 16, 1993 and dated February 5, 1993), Modification of Loan
Agreement and Forbearance Agreement dated as of June 30, 1993 between
Agent and Borrowers (incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
July 19, 1993 and dated June 9, 1993), Moratorium Agreement dated as of
October 29, 1993 between Agent and Borrowers incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on November 10, 1993 and dated October 29, 1993),
Moratorium Amendment dated as of December 24, 1993 between Agent and
Borrowers (incorporated by reference from Exhibit 2 to the Company's
Form 8-K filed with the Securities and Exchange Commission on January
24, 1994 and dated December 8, 1993), Second Moratorium Amendment dated
as of March 25, 1994 between Agent and Borrowers (incorporated by
reference from Exhibit 1 to the Company's Form 8-K filed with the
30
<PAGE>
Securities and Exchange Commission on April 1, 1994 and dated March 25,
1994), Third Moratorium Amendment dated as of May 27, 1994 between
Agent and Borrowers (incorporated by reference from Exhibit 10(j) to
the Company's Annual Report, Form 10-K, for the year ended December 31,
1994), Fourth Moratorium Agreement dated as of August 26, 1994 between
Agent and Borrowers (incorporated by reference from Exhibit 1 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
September 27, 1994 and dated August 26, 1994), Fifth Moratorium
Agreement dated as of September 30, 1994 between Agent and Borrowers
(incorporated by reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on October 6, 1994
and dated September 30, 1994), letter agreement dated as of January 31,
1995 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1994), letter agreement dated as of February 28,
1995 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1994), letter agreement dated as of March 31, 1995
between Agent and Borrowers (incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for the year ended
December 31, 1994), letter agreement dated as of April 30, 1995 between
Agent and Borrowers (incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
June 1, 1995 and dated April 30, 1995), letter agreement dated as of
July 25, 1995 between Agent and Borrowers (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on August 4, 1995 and dated July 25, 1995), letter
agreement dated as of December 29, 1995 between Agent and Borrowers
(incorporated by reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on March 5, 1996 and
dated December 29, 1995), Loan Term-Out Agreement dated as of January
31, 1996 between Agent and Borrowers (incorporated by reference from
Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on March 5, 1996 and dated December 29, 1995), and
Extension Agreement dated as of January 7, 1997 between Agent and
Borrowers.
10(c) Forbearance Agreement dated as of April 6, 1990 between Northwestern
National Life Insurance Company, Farm Bureau Life Insurance Company of
Michigan, F.B. Annuity Company, Farm Bureau Mutual Insurance Company of
Michigan, Atlantic Bank of New York, The Daiwa Bank, Ltd., Shawmut
Bank, N.A., The CIT Group/Equipment Financing, Inc., First Mutual of
Boston, and First NH Bank, N.A., and the Company, Chancellor Fleet
Corporation, Chancellor Acquisition Corporation, Chancellor Asset
Management Corporation, Chancellor Financial lease, Inc., Chancellor
Credit, Ltd., Valmont Financial Corporation and Valmont Credit Corp.
(incorporated by reference from Exhibit 10(k) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1989).
10(d) *First Refusal Agreement dated as of June 1, 1992 between Bruncor Inc.
and Stephen G. Morison (incorporated by reference from Exhibit 1 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
July 6, 1992 and dated June 23, 1992).
10(e) Specimen of Final Form of Warrant to Purchase Common Stock of
Chancellor Corporation issued by the Company on February 5, 1993 to
each of Northwestern National Life Insurance Company, Farm Bureau Life
Insurance Company of Michigan, F.B. Annuity Company, Farm Bureau Mutual
Insurance Company of Michigan, Atlantic Bank of New York, The Daiwa
Bank, Ltd., Shawmut Bank, N.A., The CIT Group/Equipment Financing,
Inc., Federal Deposit Insurance Corporation and First NH Bank, N.A.
(the "Lenders") in denominations set forth on Schedule A to Twelfth
Amendment and Extension Agreement dated as of February 5, 1993 between
Agent and Borrowers (incorporated by reference from Exhibit 2 to the
31
<PAGE>
Company's Form 8-K filed with the Securities and Exchange Commission on
February 16, 1993 and dated February 5, 1993); and Modification of
Warrant Agreement dated as of March 31, 1993 among the Borrowers and
the Lenders (incorporated by reference from Exhibit 2 to the Company's
Form 8-K filed with the Securities and Exchange Commission on May 27,
1993 and dated May 25, 1993).
10(f) Letter agreement dated as of March 1, 1993 between the Company and
Bruncor Inc. relating to the proposed conversion of certain
indebtedness into Common Stock of the Company under a formula based on
the book value of the Common Stock (incorporated by reference from
Exhibit 10(r) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1992); and Consent Agreement dated as of March 31,
1993 among the Borrowers, the Lenders, Bruncor Inc. and The Bank of
Nova Scotia (incorporated by reference from Exhibit 3 to the Company's
Form 8-K filed with the Securities and Exchange Commission on May 27,
1993 and dated May 25, 1993).
10(g) Secured Warehouse Loan Agreement dated as of June 9, 1993 between
Chancellor Fleet Corporation and IBJ Schroder Leasing Corporation
(incorporated by reference from Exhibit 3 to the Company's Form 8-K
filed with the Securities and Exchange Commission on July 19, 1993 and
dated June 9, 1993).
10(h) Recapitalization and Stock Purchase Agreement dated as of September 20,
1994 among the Company, Bruncor Inc. and Vestex Corporation
(incorporated by reference from Exhibit 3 to the Company's Form 8-K
filed with the Securities and Exchange Commission on September 27, 1994
and dated August 26, 1994), as amended by Amendment No. 1 (incorporated
by reference from Appendix I to the Company's Proxy Statement dated
December 9, 1994), by a letter agreement dated as of February 28, 1995
among the Company, Bruncor Inc. and Vestex Corporation (incorporated by
reference from Exhibit 10(t) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1994), by Amendment No. 3 to
Recapitalization and Stock Purchase Agreement dated as of July 14, 1995
by and among the Company, Bruncor Inc., and Vestex Corporation
(incorporated by reference from Exhibit 1 to the Company's Form 8-K
filed with the Securities and Exchange Commission on August 4, 1995 and
dated July 25, 1995), and by Amendment No. 4 to Recapitalization and
Stock Purchase Agreement dated as of July 14, 1995 by and among the
Company, Bruncor Inc., and Vestex Corporation (incorporated by
reference from Exhibit 1 to the Company's Form 8-K filed with the
Securities and Exchange Commission on April 22, 1996 and dated April
12, 1996).
10(i) *1994 Stock Option Plan, adopted by the Board of Directors of the
Company on August 12, 1994 and approved by the Stockholders of the
Company on January 20, 1995 (incorporated by reference from Appendix
III to the Company's Proxy Statement dated December 9, 1994).
10(j) *1994 Directors' Stock Option Plan, adopted by the Board of Directors
of the Company on August 12, 1994 and approved by the Stockholders of
the Company on January 20, 1995 (incorporated by reference from
Appendix III to the Company's Proxy Statement dated December 9, 1994).
10(k) *1994 Employee Stock Purchase Plan, adopted by the Board of Directors
of the Company on August 12, 1994 and approved by the Stockholders of
the Company on January 20, 1995 (incorporated by reference from
Appendix IV to the Company's Proxy Statement dated December 9, 1994).
10(l) Interim Voting Agreement dated as of July 25, 1995 among the Company,
Vestex Corporation, Stephen G. Morison and the Company's other
employees and form of Voting Agreement among the Company, Vestex
Corporation, Stephen G. Morison, Bruce M. Dayton and Thomas W. Killilea
(incorporated by reference from Exhibits 4 and 5, respectively, to the
Company's Form 8-K filed with the Securities and Exchange Commission on
August 4, 1995 and dated July 25, 1995).
10(m) $200,000 Subordinated Promissory Note dated as of July 25, 1995 by the
Company in favor of Bruncor Inc. (incorporated by reference from
Exhibit 3 to the Company's Form 8-K filed with the Securities and
Exchange Commission on August 4, 1995 and dated July 25, 1995).
32
<PAGE>
10(n) Note dated November 22, 1996 in the original principal amount of
$500,000 from Chancellor Corporation to Vestex Capital Corporation.
16(a) Letter dated January 9, 1997, from Deloitte & Touche LLP (incorporated
by reference from Exhibit to the Company's Amendment No. 1 to Form 8-K
filed with the Securities and Exchange Commission on January 13, 1997
and dated December 26, 1996).
21 Subsidiaries of the Company (incorporated by reference from Exhibit 21
to the Company's Annual Report, Form 10-K, for the year ended December
31, 1995).
23(a) Independent Auditors' Consent - Reznick Fedder & Silverman
23(b) Independent Auditors' Consent - Deloitte & Touche LLP
- -------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(b)(10)(iii)(A) of Regulation
S-K.
Copies of these exhibits are available to stockholders of record at a charge of
$.09 per page, plus postage upon written request. Direct requests to: Kimberlee
R. Coleman, Assistant Clerk, Chancellor Corporation, 745 Atlantic Avenue,
Boston, MA 02111.
(b) Reports on Form 8-K:
During the fourth quarter of 1996, the Company filed a Form 8-K Report (Item 1)
dated December 3, 1996 and a Form 8-K Report (Item 4) dated December 31, 1996.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Chancellor Corporation
We have audited the accompanying consolidated balance sheet of Chancellor
Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Chancellor Corporation and subsidiaries as of December 31, 1995 and for each of
the two years in the period ended December 31, 1995 were audited by other
auditors whose report dated April 1, 1996 expressed an unqualified opinion on
those statements and contained an emphasis paragraph for a going concern
consideration.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Boston, Massachusetts
April 11, 1997 (except for Note Q
which is as of May 19, 1997)
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Chancellor Corporation:
We have audited the accompanying consolidated balance sheet of Chancellor
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 1, 1996
F-2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31,
ASSETS 1996 1995
- ------ ---- ----
Cash and cash equivalents $ 21 $ 185
Cash restricted and escrowed 3,553 4,513
Receivables, net 2,563 1,889
Leased equipment held for underwriting 1,231 1,859
Net investment in direct finance leases 748 1,421
Equipment on operating lease, net of
accumulated depreciation of $7,825
and $17,020 497 1,683
Residual values, net 748 3,340
Furniture and equipment, net of accumulated
depreciation of $2,655 and $2,453 121 179
Security deposits 897 897
Other assets 83 122
-------- --------
$ 10,462 $ 16,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued expenses $ 10,260 $ 6,842
(including $2.2 million payable to a related
party as of December 31, 1996)
Indebtedness:
Nonrecourse 1,188 3,167
Recourse 3,432 4,314
Deferred income taxes -- 400
-------- --------
Total liabilities 14,880 14,723
-------- --------
Commitments and contingencies -- --
Stockholders' equity (deficit)
Preferred stock Series AA,
Convertible - $.01 par value,
Authorized: 10,000,000 shares;
Issued: 5,000,000 and none 50 --
Common stock - $.01 par value,
Authorized: 30,000,000 shares;
Issued 6,567,302 65 65
Additional paid-in capital 24,609 23,638
Accumulated deficit (28,606) (21,802)
-------- --------
(3,882) 1,901
Less treasury stock - 1,430,911
shares at cost (536) (536)
-------- --------
Total stockholders' equity (deficit) (4,418) 1,365
-------- --------
$ 10,462 $ 16,088
======== ========
See notes to consolidated financial statements.
F-3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share and Share Amounts)
Year Ended December 31,
1996 1995 1994
---- ---- ----
Revenues:
Rental income $ 1,933 $ 4,391 $ 7,630
Lease underwriting income 504 749 499
Direct finance lease income 191 191 260
Interest income 60 72 140
Gains from portfolio remarketing 1,391 2,242 633
Fees from remarketing activities 820 668 1,160
Other income 614 178 265
-------- -------- --------
5,513 8,491 10,587
-------- -------- --------
Costs and expenses:
Selling, general and administrative 8,650 5,239 5,288
(including $2.55 million incurred to
related parties during 1996)
Interest expense 480 1,041 2,102
Depreciation and amortization 1,042 3,432 6,368
Residual value estimate reduction 2,384 -- --
Lease rental -- -- 163
-------- -------- --------
12,556 9,712 13,921
-------- -------- --------
Loss before income tax (benefit)
provision (7,043) (1,221) (3,334)
Income tax(benefit)provision (239) -- 9
-------- -------- --------
Net loss ($ 6,804) ($ 1,221) ($ 3,343)
======== ======== ========
Net loss per share ($1.32) ($ .22) ($ .52)
======== ======== ========
Weighted average common and
common equivalent shares 5,136,391 5,634,439 6,373,161
========= ========= =========
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands, Except Share Amounts)
Additional Stockholders
Preferred Stock Common Stock paid-in Accumulated Treasury Stock Equity
Shares Amount Shares Amount capital Deficit Shares Amount (Deficit)
------ ------ ------ ------ ------- ------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, 12/31/93 - $ - 4,503,402 $45 $19,495 ($17,238) 184,635 ($380) $1,922
Exercise of stock options 8,100 - - -
1.475-for-1 common stock
split effected In the
form of a 47.5% stock
dividend 2,055,210 20 (20) - -
Net loss (3,343) (3,343)
--------- ----- --------- --- ------- -------- -------- ----- -------
BALANCE, 12/31/94 - - 6,566,712 65 19,475 (20,581) 184,635 (380) (1,421)
Capital contribution by
related party 4,148 3,870,015 (484) 3,664
Stock issued,
net of expenses of
approximately $185 15 (1,600,000) 200 215
Stock grant (1,023,739) 128 128
Exercise of stock options 590 - -
Net loss (1,221) (1,221)
------ ------- --------- -- ------ -------- --------- ---- ------
BALANCE, 12/31/95 - - 6,567,302 65 23,638 (21,802) 1,430,911 (536) 1,365
Stock issued,
net of expenses of
approximately $329 5,000,000 50 971 1,021
Net loss (6,804) (6,804)
--------- ----- --------- --- ------- -------- -------- ----- -------
BALANCE, 12/31/96 5,000,000 $ 50 6,567,302 $65 $24,609 ($28,606) 1,430,911 ($536) ($4,418)
========= ====== ========= === ======= ======== ========= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CHANCELLOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 6,804) ($ 1,221) ($ 3,343)
-------- -------- --------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,042 3,432 6,368
Deferred income taxes (benefit) (400) -- --
Compensation expense recognition on stock grant -- 128 --
Changes in assets and liabilities:
Receivables (674) (205) 954
Residual values, net 2,592 (245) 1,183
Other assets 39 (34) (51)
Accounts payable and accrued expenses 3,418 (194) (2,204)
-------- -------- --------
Total Adjustments 6,017 2,882 6,250
-------- -------- --------
Net cash (used in) provided by operating activities (787) 1,661 2,907
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting 628 698 240
Net investment in direct finance leases 673 589 709
Equipment on operating lease 302 2,421 3,007
Net change in cash restricted and escrowed 960 555 4,048
Disposals of (additions to) furniture and equipment, net (100) (28) 23
-------- -------- --------
Net cash provided by investing activities 2,463 4,235 8,027
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - recourse 570 -- --
Additions to indebtedness - nonrecourse -- 11,797 2,874
Repayments to indebtedness - nonrecourse (1,979) (13,835) (10,059)
Repayments of indebtedness - recourse (1,452) (3,967) (3,844)
Sale of common stock, net of expenses -- 215 --
Sale of preferred stock, net of expenses 1,021 -- --
-------- -------- --------
Net cash used in financing activities (1,840) (5,790) (11,029)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (164) 106 (95)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 185 79 174
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 21 $ 185 $ 79
======== ======== ========
Non-Cash Activity
Capital contribution by a related party in the form of
debt forgiveness $ -- $ 4,148 $ --
======== ======== ========
Acquisition of treasury stock $ -- $ 484 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Business Organization and Significant Accounting Policies:
Business
Chancellor Corporation and Subsidiaries (the "Company") are engaged in
originating and selling equipment leasing transactions involving primarily
transportation, material handling, construction and occasionally other
equipment.
Basis of Presentation
The accompanying consolidated financial statements for the years ended
December 31, 1995 and 1994 have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the consolidated financial
statements, during the years ended December 31, 1995 and 1994, the Company
incurred net losses of $1,221,000, and $3,343,000, respectively. These factors,
among others indicated that as of December 31, 1995 the Company might be unable
to continue as a going concern for a reasonable period of time.
During 1996 and 1997 the Company completed certain steps toward
improving the Company's consolidated financial position and liquidity. First,
the Company approved and put into place a restructuring plan in December 1996
which included replacement of the management team, downsizing of staff to a
level necessary to execute the restructuring plan, and sale of certain assets to
generate additional cash flow. Next, the Company's majority stockholder, Vestex
Capital Corporation and the Company extinguished approximately $1.9 million to a
lender group. In addition, the Company issued a promissory note in the amount of
$1.5 million (see Note G).
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, and a 50% owned subsidiary (see Note M).
All significant intercompany accounts, transactions and profits and losses have
been eliminated in consolidation.
Revenue Recognition
Lease underwriting income - Lease underwriting fees arise from the sale
of equipment leasing transactions and include cash underwriting margins and
residual value fees. The excess of the sale price of equipment to an investor
(including the assumption of any nonrecourse indebtedness) over its cost to the
Company represents lease underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases, for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a nonrecourse basis. The equipment, subject to the lease and the borrowing
(if any), is then sold to investors using the structure of a grantor trust which
is then managed by the Company. Consideration for the sale of the leased
equipment to investors is normally in the form of a cash investment.
Residual value fees arise from the sale of lease transactions to
investors. These fees represent the Company's present value share of the future
residual value of the leased equipment which the Company expects to realize upon
successful remarketing of the equipment.
Direct finance lease income - Lease contracts which qualify as direct
finance leases are accounted for by recording on the balance sheet minimum lease
payments receivable and estimated residual values on leased equipment less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease, on the basis that produces
a constant rate of return.
F-7
<PAGE>
Operating leases (Rental Income)- Lease contracts which qualify as
operating leases are accounted for by recording the leased equipment as an
asset, at cost. The equipment is then depreciated on a straight-line basis over
two to fifteen years to its estimated residual value. Equipment is further
depreciated below its initial residual value upon release to its estimated
revised residual value at release expiration. Any changes in depreciable lives
affect the associated expense on a prospective basis. Rental income from
operating leases is recognized using a straight-line method over the initial
term of the lease.
Residual Values
The Company reviews recorded residual values and performs a
recoverability study on an annual basis. Writedowns in estimated residual
values, due to declines in equipment value or the financial creditworthiness of
individual customers and major industries into which the Company leases
equipment, are recorded when considered other than temporary. Through 1995, the
residual values were estimated based on a Company developed database by
comparing future estimated values with historical experience. In 1996, as a
result of changes in market conditions, the Company reassessed the valuation
model and database, and the residual valuation was based on independent
valuation of the equipment held under trust lease and valuation model.
Initial Direct Lease Costs
The Company capitalizes and defers initial direct costs incurred in
originating operating and direct finance leases at lease commencement. Initial
direct costs are included in other assets and are amortized over the term of the
leases using a straight-line method. Initial direct costs were fully amortized
as of December 31, 1994.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Cash Restricted and Escrowed
Restricted and escrowed cash balances are available only for specific
purposes related to payments to investors, payment of taxes related to equipment
owned by investors, debt service payments, and working capital allotments
permitted by the Company's loan agreements.
Leased Equipment Held for Underwriting
Equipment inventories are valued at the lower of cost (specific
identification) or market. Revenues and expenses associated with this equipment
are deferred until the equipment is sold or added to the Company's owned
portfolio.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed
using a straight-line method over 5 years based on the estimated useful lives of
the related assets. Leasehold improvements are amortized over the lease term.
Income Taxes
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," requires an asset and liability approach for
financial accounting and reporting for income taxes. In addition, future tax
benefits, such as net operating tax carryforwards, are recognized to the extent
realization of such benefits is more likely than not.
Stockholders' Equity (Deficit)
Effective April 12, 1996, the Company issued and sold to Vestex Capital
Corporation 5,000,000 shares of its Series AA Convertible Preferred Stock for
F-8
<PAGE>
$1,350,000 in cash, less reimbursement of $312,500 of due diligence costs to
Vestex Capital Corporation and $17,000 of other transaction costs (the
"Preferred Stock Placement"). Each share of Series AA Convertible Preferred
Stock is entitled to the number of votes equal to the number of whole shares of
Common Stock into which the shares of Series AA Preferred Stock held by Vestex
are then convertible. The holders of shares of Series AA Preferred Stock shall
be entitled to receive cash dividends only to the same extent and in the same
amounts as dividends are declared and paid with respect to Common Stock as if
the Preferred Stock had been converted to Common Stock in accordance with the
provision related to conversion.
On July 25, 1995, the Company simultaneously completed a
recapitalization of its balance sheet, the sale of 1,600,000 shares of Common
Stock to Vestex, Inc., and an award of 1,023,739 shares of Common Stock to the
Company's employees. The impact of these transactions included the elimination
of $720,000 of accrued interest included in accounts payable and $3,494,000 of
subordinated recourse debt; an increase of $4,163,000 of additional paid-in
capital; and an increase in treasury stock of $156,000 (1,246,276 shares),
including the recognition of $128,000 of compensation expense related to the
stock grant.
On January 20, 1995, the Company effected a 1.475-for-1 split in the form
of a 47.5% Common Stock dividend. On the same day, the stockholders also
approved an amendment to the Articles of Organization in order to increase the
number of shares of Common Stock from 10,000,000 to 30,000,000 and authorized
10,000,000 shares of preferred stock ($0.01 par value). Stockholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from additional paid-in capital to Common Stock the
par value of the additional shares arising from the split. In addition, all
references in the financial statements to number of shares, per share amounts,
stock option data, and market price of the Company's Common Stock have been
restated.
Stock-based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows the Company to account for stock-based awards
(including stock options) to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No, 25, "Accounting for
Stock Issued to Employees".
Net Loss per Share
Net loss per share amounts are computed based on the weighted average
number of common and common equivalent shares, when dilutive, which were
outstanding during the period.
Reclassifications
Certain amounts in previous years' consolidated financial statements
have been reclassified to conform with the 1996 presentation.
Supplemental Cash Flow Information
Cash paid for income taxes during 1996, 1995 and 1994 was $29,000,
$41,000, and $29,000, respectively.
Interest paid during 1996, 1995 and 1994 was $903,000, $1,257,000 and
$2,162,000, respectively.
Other Assets
In connection with the December 1993 amendment to the Company's
corporate office lease, the Company executed a promissory note in favor of its
landlord in the principal amount of $796,000 due January 1999. The note is
included in accounts payable and accrued expenses and a related asset, including
a $100,000 security deposit, is included in deposits. The security deposit will
offset the note in 1999 provided that the Company does not
F-9
<PAGE>
default on its lease. In the event of default by the Company under the lease,
the security deposit will be forfeited and the note will be accelerated.
Accounting for Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make assumptions regarding
estimates reported in these consolidated financial statements. These estimates
primarily include residual values, the useful lives of fixed assets and deferred
income taxes, among others. These assumptions could change based on future
experience and, accordingly, actual results may differ from these estimates.
Recent Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long- Lived
Assets and for Long-Lived Assets to be Disposed of." This standard requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Adopting
SFAS No. 121 had no significant impact on the 1996 consolidated financial
statements.
In June 1996, Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125), was issued. SFAS 125 establishes accounting and
reporting standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS 125 is effective for
transfers of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No 125," (SFAS 127) was issued. This statement changes the effective date of
certain provisions of SFAS 125 to transfers occuring after December 31, 1997.
The Company is currently evaluating the impact of SFAS 125 and 127 on the
consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". SFAS No 128 specifies required disclosures relating to
earnings per share data. SFAS No. 128 effective for fiscal years ending after
December 15, 1997 and earlier application is not permitted. The implementation
of these standards is not expected to materially affect the Company's
consolidated financial statements.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities that constitute
financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments," approximate their recorded amounts.
B. Receivables:
December 31,
-------------------
1996 1995
----- ------
(In Thousands)
Notes receivable $ - $ 37
Receivables from trusts 96 45
Accrued rents 94 287
Lease underwriting receivable 2,327 1,499
Other 46 21
----- ------
2,563 1,889
===== ======
Notes receivable arise principally from investor equity investments and
obligations to the Company relating to sales of leased equipment. These notes
were non-interest bearing and were written off in 1996.
F-10
<PAGE>
Receivables from trusts represent amounts due the Company for cash
outlays associated with the remarketing of equipment. These amounts will be
collected upon successful remarketing of such equipment.
Lease underwriting receivable relates to the Company's lease
origination, underwriting and syndication business.
C. Residual Values, Net:
The Company's lease underwriting income includes consideration in the
residual value sharing arrangements received from originating and selling lease
transactions to investors. This type of consideration (residual values) will be
realized by the Company upon remarketing of the equipment at termination or
expiration of the related leases. The Company's share of expected future
residual values is recorded as income at their discounted present value at the
time the underlying leases are sold to investors. Any increases in the Company's
expected residual sharing are recorded as gains upon realization. Write-down in
estimated residual value due to declines in equipment value or the financial
creditworthiness of individual customers and major industries into which the
Company leases equipment, are recorded when considered other than temporary.
Prior to 1996, the Company utilized a combination of benchmark/matrices for
establishing performance of the residual portfolio. During 1996, due to changes
in market conditions, the Company evaluated residual values based upon
independent assessments by an industry professional, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
December 31,
------------------
1996 1995
------ ------
(In Thousands)
Residual values, beginning of year, net $3,340 $3,095
Residual fees recorded 268 605
Realization (477) ( 360)
Residual value estimate reduction (2,383) -
------- ------
Residual values, end of year, net $ 748 $3,340
====== ======
Residual value estimate reductions represent reductions in expected
future residual values on certain equipment, the residuals which were
substantially all recorded prior to 1996. Such reductions resulted from an
extensive review and valuation of all assets owned, leased and managed by the
Company. See Note F for additional information on the review and valuation. For
the years ended December 31, 1996, 1995 and 1994, the Company realized income of
approximately $820,000, $668,000 and $1,160,000, respectively, relating to the
remarketing of equipment for which no residuals were recorded or realized
amounts exceeded the booked residual.
Aggregate residual value fees expected to be realized as of December 31,
1996 are as follows (in thousands):
Year ending December 31:
1997 $330
1998 72
1999 224
2000 81
Thereafter 41
----
$748
====
F-11
<PAGE>
D. Net Investment in Direct Finance Leases and Equipment on Operating
Lease:
Net investment in direct finance leases consisted of:
December 31,
------------
1996 1995
------ ------
(In Thousands)
Minimum lease payments receivable $ 703 $ 1,061
Estimated unguaranteed residual values of
leased equipment, net
150 526
Less unearned income (105) (166)
------- -------
$ 748 $ 1,421
======= =======
The cost of equipment on operating lease by category of equipment is as
follows:
December 31,
------------
1996 1995
------ ------
(In Thousands)
Transportation equipment $ 3,714 $ 11,814
Other equipment 4,518 6,889
-------- --------
8,232 18,703
Less accumulated depreciation (7,735) (17,020)
-------- --------
$ 497 $ 1,683
======== ========
The aggregate amounts of minimum lease payments to be received from
non-cancelable direct finance and operating leases are as follows:
Direct Finance Operating
-------------- ---------
Year ending December 31: (In Thousands)
1997 $457 $327
1998 179 173
1999 36 79
2000 17 74
2001 and thereafter 14 77
---- ----
$703 $730
==== ====
Included in the operating lease and direct finance lease portfolios are
approximately $52,000 and $106,000 of equipment held for remarketing, stated at
net book value, as of December 31, 1996 and 1995, respectively.
E. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expense consists of:
December 31,
------------
1996 1995
------ ------
(In Thousands)
Trade accounts payable
(including $2.2 million payable to
a related party as of December 31,
1996) $6,177 $2,348
Payables to trusts 2,569 2,712
Accrued interest payable 40 24
Restructuring costs 524 -
Other 950 1,758
------- ------
$10,260 $6,842
======= ======
F-12
<PAGE>
F. Residual Value Estimate Reductions and Lessee Credit-Related Portfolio
Losses:
The Company performs a review and revaluation of all assets owned,
leased and managed by the Company every year. In 1994 and 1995, continued review
of the estimated values resulted in no changes to the Company's recorded
residual values.
Prior to 1996, the Company utilized a combination of benchmark/matrices
for establishing performance of the residual portfolio. During 1996, due to
changes in market conditions, the Company evaluated residual values based upon
independent assessments by an industry professional, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
The Company recognized a $2.4 million reduction in trust residual values in
1996. Substantially all of the residual write-down for the year 1996 was
associated with equipment leased and sold to investors by the Company prior to
1996.
G. Indebtedness:
The Company has four principal sources of financing: (1) an
intercreditor loan, (2) a secured inventory loan, (3) a nonrecourse inventory
loan facility, and (4) two subordinated loans.
The intercreditor loan had a balance of $995,000 as of December 31, 1996.
Repayment of the loan is secured by virtually all assets of the Company not
otherwise encumbered. Since April 1990, when the intercreditor loan was formed
through the restructuring of most of the Company's unsecured recourse debt, the
intercreditor loan has been renewed 28 times, most recently in the form of a
Loan Term-Out Agreement entered into on January 7, 1997 for the period through
November 25, 1997, during which the entire loan balance will be amortized.
During each renewal period, the intercreditor group lenders agreed to forbear
from exercising certain rights under their original individual loan agreements
in exchange for the Company's agreements to (a) make principal and interest
payments as agreed, (b) secure the continued subordination by another lender,
and (c) operate within other covenants typical for this type of financing,
including a prohibition on payment of dividends and restrictions on capital
spending. Since the January 31, 1996 term-out of the loan, the interest rate is
prime plus 2% (10.25% as of December 31, 1996).
A secured inventory loan of $1.7 million as of December 31, 1996 ($1.8
million as of December 31, 1995) is provided by the same lender group which
provides the intercreditor loan. The facility will expire on November 25, 1997.
This inventory loan is secured by either cash or equipment subject to leases.
This facility allows the Company to purchase equipment subject to a lease before
selling the transaction to an investor. The interest rate was 3.5% above the
prime rate until January 31, 1996. The new rate is prime plus 2% (10.25% as of
December 31, 1996).
The Company also has a non-recourse loan facility which supplements the
secured inventory loan described above. The nonrecourse loan facility provides
for the financing of the discounted lease stream and a portion of the residual
value of the equipment subject to those leases. Fundings under this $10 million
facility are subject to the lender's credit approval of the lessee. The interest
rate on amounts borrowed is 2% above the prime rate. At December 31, 1996, no
balance was outstanding. The nonrecourse loan facility does not include $944,000
and $1.8 million as of December 31, 1996 and 1995, respectively, of nonrecourse
debt which was borrowed in prior years by directly assigning rentals to the
nonrecourse lenders. The Company has not required this type of financing since
1989 because of the unavailability of capital to finance the difference between
the equipment purchase price and the present value of the rental stream advanced
by the nonrecourse lender.
The intercreditor loan of $995,000, the secured inventory loan of $1.7
million, a $500,000 subordinated loan from Vestex, Inc., $70,000 equipment loan,
and a $200,000 subordinated loan from Bruncor, Inc. together make up the $3.4
million of recourse debt outstanding at December 31, 1996. Loan payable to
Vestex bears interest at 2% above the prime rate and is due in November
F-13
<PAGE>
1997. Loan payable to Bruncor, Inc. bears interest at 1% over the base rate (as
defined in the agreement) and is due in July 2000. The equipment loan is payable
in monthly interest and principal amount of $1,680 and is due in November 2000.
In April 1997, both the intercreditor loan and the secured inventory
loan were repaid in advance of their respective terms. The aggregate amount of
this debt on the repayment date was $1,906,000 of which approximately $976,000
was paid in cash and the balance of $930,000 was forgiven. In addition, the
Company paid approximately $22,000 in legal and bank fees to complete this
transaction.
Aggregate annual commitments under recourse debt as adjusted for
extinguishment of the intercreditor loan discussed above are as follows (in
thousands):
Year ending December 31:
1997 $3,183
1998 14
1999 16
2000 219
------
$3,432
======
In connection with an extension agreement negotiated in February 1993,
the Company granted the lender group warrants to purchase up to 10% of the
Common Stock of the Company (513,639 shares as of December 31, 1995) on a fully
diluted basis for $1.09 per share in consideration of the lenders having
accommodated several loan modifications requested by the Company, including a
limited amount of buy-sell remarketing financing capability. In December 1996,
the lenders sold to VCC their warrants to purchase up to 10% of the Company's
capital stock (approximately 1,160,000 shares as of December 31, 1996) on a
fully-diluted basis for $.27 per share in consideration of VCC subordinating its
$500,000 loan to that of the intercreditor loan and secured inventory loan.
Maximum amounts of recourse indebtedness outstanding were approximately
$4.0 million and $11.0 million during the years ended December 31, 1996 and
1995, respectively, and the weighted average interest rates were 10.3% and
11.8%,respectively, for these same periods.
Nonrecourse indebtedness consists of notes payable to banks and
financial institutions arising from assignments of the Company's rights, (most
notably the right to receive rental payments) as lessor, at interest rates
ranging from 7.5% to 14%. Amounts due under nonrecourse notes are obligations of
the Company which are secured only by the leased equipment and assignments of
lease receivables, with no recourse to any other assets of the Company. The
Company is at risk, however, for the amount of residual value booked on
equipment sold to investors and its net investment in equipment for its own
portfolio in the event of a lessee default.
F-14
<PAGE>
Aggregate future maturities of nonrecourse indebtedness as of December
31, 1996 are as follows (in thousands):
Year ending December 31:
1997 $ 620
1998 305
1999 97
2000 79
2001 and thereafter 87
------
$1,188
======
H. Income Taxes:
The provision (benefit) for income taxes consists of:
1996 1995 1994
---- ---- ----
Current:
Federal $ 90,000 $ -- $ --
State 71,000 -- 9,000
Deferred:
Federal (400,000) -- --
State -- -- --
--------- ------ ---------
Total ($239,000) $ -- $ 9,000
========= ====== =========
A reconciliation of the rate used for the provision (benefit) for
income taxes is as follows:
1996 1995 1994
---- ---- ----
Tax benefit at statutory rate 34.0% 34.0% 34.0%
Net operating loss carry forward
benefit for which utilization
is not assured and other items (37.4) (34.0) (33.7)
------ ------ ------
Total (3.4%) 0.0% 0.3%
====== ====== ======
The Company files consolidated federal income tax returns with all of its
subsidiaries. As of December 31, 1996, the Company has net operating loss
carryforwards of approximately $28.5 million available for federal tax purposes,
which expire in the years 2001 through 2010. In addition, at December 31, 1996,
the Company has investment tax credit carryforwards for federal income tax
purposes available to offset future taxes of $2.5 million expiring in the years
1997 through 2001. The July 1995 recapitalization transaction was a greater than
50% change in ownership for Federal tax purposes. Accordingly, utilization of
net operating loss and tax credit carryforwards will be limited in future years.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
F-15
<PAGE>
The tax effects of significant items comprising the Company's net deferred tax
liability are as follows:
December 31,
------------
1996 1995
---- ----
(In Thousands)
Deferred tax liabilities:
Differences between book and tax
basis of property $ 1,180 $ 2,984
-------- --------
Deferred tax assets:
Accrued lease rents 26 220
Reserves not currently deductible 159 827
Net operating loss carryforwards 11,434 8,778
Tax credit carryforwards 2,556 2,556
Other 8 160
-------- --------
Total deferred tax assets 14,183 12,541
Valuation allowance (13,003) (9,957)
-------- --------
Net deferred tax liability $ -- $ 400
======== ========
All deferred tax liabilities and deferred tax assets (except tax credit
carryforwards) are tax effected at a combined 40% rate for state and federal
taxes. The valuation allowance relates primarily to net operating loss
carryforwards and tax credit carryforwards that may not be realized. The
valuation allowance increased by $3,046,000 in 1996. For the years ended
December 31, 1995 and 1994, the valuation allowance decreased by $935,000 and
increased by $2,915,000, respectively.
The deferred tax asset is available to offset taxable income in excess
of book income generated from the lease portfolio and residual values which are
the principal components of the total deferred tax liabilities of $1.2 million
and $3 million as of December 31, 1996 and 1995, respectively. Because the
deferred tax asset can be used to directly offset the deferred tax liability,
the Company has determined there is no need to provide a full valuation
allowance for the deferred tax asset.
I. Stock Option Plans and Stock Purchase Plan:
The Company has three stock option plans: a 1994 Stock Option Plan, a 1994
Directors' Stock Option Plan, and a 1983 Stock Option Plan, which has expired
but under which certain granted options are outstanding.
The Company's stock option plans provide that incentive and nonqualified stock
options to purchase up to an aggregate of 2,872,500 (which includes 1,100,500 of
options related to the 1983 stock option plan which has expired) shares of the
Common Stock of the Company may be granted to key contributors to the Company,
including officers, directors and employees. Options are granted at the fair
market value of the Common Stock as of the date of grant, as determined by the
Board of Directors. Options currently expire no later than ten years from the
grant date and generally become exercisable ratably over one to two years from
the grant date except options issued to directors, which become exercisable
immediately.
F-16
<PAGE>
Information with respect to the stock option plans was as follows:
1994
Directors
1994 Stock Stock Option Expired Stock Weighted Average
Option Plan Plan Option Plan Exercise Price
----------- ------------ ------------- ----------------
Outstanding
December 31, 1993 -- -- 394,414 $ .71
Options granted -- -- --
Options exercised -- -- (11,948) .71
Options canceled -- -- (24,496) .71
---------- ---------- ---------- --------
Outstanding,
December 31, 1994 -- -- 357,970 .71
Options granted 1,207,000 95,000 -- .16
Options exercised -- -- (590) .71
Options canceled -- -- (353,399) .71
---------- ---------- ---------- --------
Outstanding,
December 31, 1995 1,207,000 95,000 3,981 .16
Options granted -- 234,500 -- .25
Options canceled (72,715) -- (737) .007
---------- ---------- ---------- ---------
Outstanding,
December 31, 1996 1,134,285 329,500 3,244 $ .18
========== ========== ========== ========
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
Options Outstanding
-------------------
Number Weighted Average Exercisable
Exercise Price Of Shares Contractual Life Options
-------------- --------- ---------------- -------
$.0067 3,244 6.1 3,244
$.1250 605,743 8.5 605,743
$.1875 528,542 8.5 -
$.2500 329,500 8.5 329,500
------- -------
Total 1,467,029 938,487
========= =======
The weighted average exercise price of the options outstanding at December 31,
1996 was $.18.
Pro forma information. The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, because the exercise price of
the Company's employee stock options which equal or exceeds the market price of
the underlying stock on the date of the grant, no compensation expense is
recognized in the Company's financial statements.
SFAS No. 123 requires the disclosure of pro forma net income (loss) and earnings
per share as if the Company had adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock options to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
F-17
<PAGE>
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly differs from the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 12 months
following vesting- stock volatility 100% in 1996 and 1995, risk free interest
rate, 10% in 1996 and in 1995 and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1995 and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net loss would have been $1,244,000 ($.22 per share) in
1995 and $6,842,000 ($1.33 per share) in 1996. The effects on pro forma
disclosures of applying SFAS No. 123 are not likely to be representative of the
effects on pro forma disclosures of future years.
Employee Stock Purchase Plan:
The Company's 1994 Employee Stock Purchase Plan authorizes the offering
to employees of up to 250,000 shares of Common Stock in six semiannual offerings
at a price of 85% of the Common Stock's bid price and in an amount determined by
a formula based on each employee's estimated annual compensation. This plan was
authorized by the Company's stockholders in January 1995. No shares of Common
Stock have been offered pursuant to the plan to date.
The Company has reserved 250,000 shares of Common Stock for all amounts
which may be offered to employees under this plan.
J. Commitments and Contingencies:
The Company rents its corporate offices under a ten-year non-cancelable
lease. The future minimum rental commitments are as follows:
Year ending December 31:
1997 $353,000
1998 353,000
1999 29,000
Of these future minimum rental payments, $524,000 has been accrued as a
restructuring charge as of December 31, 1996, as a result of the Company's
intention to relocate its corporate offices in mid-1997. Rental expense for the
years ended December 31, 1996, 1995 and 1994 amounted to $182,000, $247,000 and
$287,000, respectively.
In connection with the December 1993 amendment to the Company's
corporate office lease, the Company executed a promissory note in favor of its
landlord, Aetna Casualty and Surety Company, in the principal amount of $796,000
due January 1999. The note, which does not bear interest, will be fully canceled
if the Company fulfills its remaining lease obligations without default. If the
Company defaults under the lease, the note will be accelerated and a $100,000
security deposit will be forfeited. The note is included in accounts payable and
accrued expenses.
On January 15, 1997, Chancellor filed a complaint in Superior Court,
Suffolk County, Massachusetts, alleging that certain of its former officers and
directors are liable to the corporation for losses incurred as a result of their
negligence, breach of fiduciary duties, unjust enrichment, conversion, and
unfair and deceptive trade practices. In addition, Chancellor's complaint seeks
the imposition of a constructive trust for the corporation's benefit on various
assets that Chancellor claims were wrongfully taken from the corporation by its
former officers and directors, as well as recovery of damages arising from legal
malpractice allegedly committed by the corporation's former general counsel, and
defamatory statements made by one former officer and director to certain of the
corporation's customers.
Four of the defendants, Stephen G. Morison, David W. Parr, Gregory S.
Harper and Thomas W. Killilea, have answered the complaint (denying its
F-18
<PAGE>
allegations), have filed a counterclaim against Chancellor, and have commenced a
third-party action against Brian M. Adley, Vestex Corporation and Vestex Capital
Corporation. The counterclaim alleges that Chancellor is liable for breach of
certain employment and severance agreements allegedly entered into with the
defendants Morison and Harper, and for the abuse of process in connection with
the corporation's initiation of this lawsuit. The third-party complaint seeks
indemnification and contribution from Adley, Vestex Corporation and Vestex
Capital Corporation in connection with the claims raised by Chancellor in the
primary action. In addition, the third party complaint seeks recovery of damages
from Adley, Vestex Corporation and Vestex Capital Corporation for alleged abuse
of process, interference with the contractual relations and deceit. In their
answer to the counterclaim the third-party complaint, Chancellor and the
third-party defendant have denied the defendants' allegations.
In the normal course of its business, the Company is from time to time
subject to litigation. Management does not expect that the outcome of any of
these actions as noted above will have a material adverse impact on the
Company's consolidated financial position or results of operations.
K. Major Customers:
The Company is engaged principally in originating and selling equipment
leasing transactions. During 1996, 42%, 11% and 10% (based on original equipment
cost) of the new lease transactions originated by the Company were with the
three largest lessees. In addition, approximately 26%, 16% and 13% (based on
original equipment cost) of equipment sold to investors in 1996 were purchased
by the three largest investors. During 1995, 41%, 15% and 12% (based on original
equipment cost) of the new lease transactions originated by the Company were
with the three largest lessees. In addition, approximately 24%, 17% and 16%
(based on original equipment cost) of equipment sold to investors in 1995 were
purchased by the three largest investors. During 1994, 36%, 12% and 12% (based
on original equipment cost) of new lease transactions originated by the Company
were with the three largest lessees. In addition, approximately 27%, 23% and 19%
(based on original equipment cost) of equipment sold to investors in 1994 were
purchased by the three largest investors.
[GRAPHIC OMITTED]
L. Employee Benefit Plan:
The Company sponsors a 401(k) retirement plan (the "Plan") for the
benefit of its employees. The Plan enables employees to contribute up to 15% of
their annual compensation. The Company's contributions to the Plan amounted to
approximately $19,000, $18,000 and $19,000 in 1996, 1995 and 1994, respectively.
M. Minority Interest in a Subsidiary
During 1996, the Company acquired a fifty percent interest in TruckScan
LLC ("TruckScan")for a $350,000 contribution to equity. Due to the level of
control the Company exercises over the operation of TruckScan, TruckScan's
financial statements are consolidated with the financial statements of the
Company and its other subsidiaries.
TruckScan had a $422,000 loss from June 21, 1996 (the date of its
inception) through December 31, 1996. The minority owner's share of this loss
exceeded its equity by $211,000. As a result, the entire loss of $422,000 is
recognized by the Company. (See Note Q)
N. Concentration of Credit Risk
The Company maintains its cash balances in two banks. The balances are
insured by the Federal Deposit Insurance Corporation up to $100,000 by each
bank. As of December 31, 1996, the uninsured portion of the cash balances held
at one of the banks was approximately $1,595,000.
O. Restructuring
In order to improve the Company's liquidity, return to profitability
and create growth opportunities, management initiated a plan during the year
ended
F-19
<PAGE>
December 31, 1996 which provides for, among other things, expanding its core
business by servicing middle market clients, expanding into new transportation
and equipment markets and seeking strategic financial partnerships and joint
ventures domestically and internationally. As part of the restructuring, the
Company repaid the intercreditor loan and the secured inventory loan subsequent
to December 31, 1996 as described in Note G. The Company believes that these
initiatives will allow the Company to improve financial performance and
liquidity. Included in 1996 selling, general and administrative expenses is a
charge of $524,000 for costs associated with the restructuring plan.
P. Related Party Activity
The Company entered into an agreement with Vestex, Inc., an affiliate of the
majority stockholder, whereby Vestex provides specified services related to the
Company's operations, equity raising efforts, financing activities and other
matters. Under the agreement, Vestex earns a fee for consummating any equity or
debt transaction that exceeds $2.5 million. The fee related to debt transactions
equals 1.5% of the transaction amount. The fee related to equity transactions
equals 7.5% of the transaction amount if a broker or underwriting fee is not
paid to a third party and 2.5% of the transaction amount if a broker or
underwriting fee is paid to a third party. The agreement expires in June 1997.
During 1996, Vestex charged the Company fees for certain transactions it
determined were consummated during the year and were covered by the agreement.
The Company disputed a certain portion of these charges. The parties settled
this dispute by agreeing that $2.2 million dollars was incurred relating to
services performed in 1996. This amount is included in selling, general, and
administrative expenses on the consolidated statement of operations. The entire
amount was unpaid as of December 31, 1996 and is included in accounts payable
and accrued expenses on the balance sheet. Per the agreement, the payment is due
on demand, however, Vestex has agreed that the Company will only pay the fee
during the coming year if payment can be made from refinancing or equity
proceeds in a manner that does not impact the Company's ability to meet its
other obligations.
In April 1996, the Company issued 5,000,000 shares of Series AA Convertible
Preferred Stock to Vestex Capital Corporation, an affiliate of the majority
stockholder for $1,350,000. In accordance with an agreement between the Company
and Vestex, Vestex, Inc. charged a fee equal to $312,500 for reimbursement of
due diligence, negotiations, and closing costs related to the transaction. This
amount was paid in full during 1996 and is included in the consolidated
statement of stockholder's equity as a reduction of the additional paid in
capital. Additionally, Vestex forgave proposed but undeclared dividends of
$1,150,000.
During 1996 the Company's 50% owned subsidiary, Truckscan LLC, entered into a
consulting agreement with the other 50% owner. Under the agreement, the other
50% owner provided consulting services on technical matters related to
Truckscan's product. Truckscan incurred and paid $350,000 during 1996 under this
agreement. This amount is included in selling, general, and administrative
expenses on the consolidated statement of operations.
As of December 31, 1996, the Company owes Vestex Capital Corporation, the
majority stockholder, $500,000 under a loan agreement as described in Note G.
Q. Subsequent Events
On May 19, 1997 the Company issued a $1.5 million promissory note to
the Vice Chairman of the Board which was guaranteed by the Chairman of the
Board. The promissory note bears interest at the prime rate plus 2 1/8% (10 3/8%
at May 19, 1997). The Company is also in the process of negotiating an
additional $2.5 million loan with a bank and a $2.5 million warehouse line of
credit facility with a financing institution owned by the Vice Chairman of the
Board. Although there can be no assurance that such financing will occur,
management is confident that these additional financing transactions can be
closed by June 1997.
F-20
<PAGE>
In February 1997, the Board of Directors approved the issuance of
3,000,000 shares of the Company's preferred stock at $.30 per share to Vestex in
consideration of $900,000 of the $2.2 million of consulting fees due to Vestex
as of December 31, 1996. In addition, during the first quarter of 1997, the
Company received loans from VCC of approximately $250,000 which are due on
demand.
In April 1997, the Board of Directors approved the issuance of
2,000,000 shares of Common Stock for new management and employees. Vestex will
contribute 500,000 shares of Common Stock that it currently owns into this
incentive program for a total of 2,500,000 new shares available under this
program.
On May 1, 1997 the Company sold its 50% investment in Truckscan to
Telescan a party unrelated to the Company. In consideration for the sale, the
Company received certain assets from Telescan with an estimated value of $35,000
and a one year promissory note in the amount of $50,000 secured by certain
assets of Telescan and forgiveness of a promissory commitment to contribute
capital of approximately $300,000 which was authorized by the former management
and Board.
F-21
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
Dated: May 30, 1997
By: /s/ John J. Powell
John J. Powell
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: May 30, 1997 By: /s/ John J. Powell
John J. Powell
President, Chief Executive
Officer, Principal Financial
Officer and Principal Accounting
Officer
Dated: May 30, 1997 By: /s/ Brian M. Adley
Brian M. Adley
Chairman of the Board and Director
Dated: May 30, 1997 By: /s/ Ernest Rolls
Ernest Rolls
Director
Dated: May 30, 1997 By: /s/ Rudolph Peselman
Rudolph Peselman
Director
Dated: May 30, 1997 By: /s/ Michael Marchese
Michael Marchese
Director
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Chancellor Corporation
We consent to the incorporation by reference in Registration Statements Nos.
2-97816 and 33-8656 of Chancellor Corporation on Form S-8, as amended, of our
report dated April 11, 1997 (except for Note Q which is as of May 19, 1997)
appearing in this Annual Report on Form 10-K of Chancellor Corporation for the
year ended December 31, 1996.
/s/ REZNICK FEDDER & SILVERMAN
Boston, Massachusetts
May 30, 1997
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Chancellor Corporation
We consent to the incorporation by reference in Registration Statements Nos.
2-97816 and 33-8656 of Chancellor Corporation on Form S-8, as amended, of our
report dated April 1, 1996 (which expresses an unqualified opinion and includes
an explanatory paragraph relating to the Company's ability to continue as a
going concern) appearing in this Annual Report on Form 10-K of Chancellor
Corporation for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
May 30, 1997
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<ARTICLE> 5
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 21 185
<SECURITIES> 0 0
<RECEIVABLES> 2,563 1,889
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<PP&E> 121 179
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0 0
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<COMMON> (4,468) 1,365
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<INCOME-PRETAX> (7,043) (1,221)
<INCOME-TAX> (239) 0
<INCOME-CONTINUING> (6,804) (1,221)
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